Money Laundering

Introduction.................................................... 1

By Richard Weber

Suspicious Activity Reports Disclosure and Protection. ................ 2

By Lester Joseph

Money Laundering Trends . ..................................... 1 4

By Emery Kobor

The Money Laundering Statutes (18 U.S.C. §§ 1956 and 1957). ........ 2 1

By Stefan D. Cassella

One-Hour Money Laundering: Prosecuting Unlicensed Money

Transmitting Businesses Using Section 1960......................... 3 4

By Courtney J. Linn

Bulk Cash Smuggling. .......................................... 4 1

By Rita Elizabeth Foley

Sources of Information in a Financial Investigation................... 4 8

By Alan Hampton

Criminal Prosecution of Banks Under the Bank Secrecy Act........... 5 4

By Lester Joseph and John Roth

September

2007

Volume 55

Number 5

United States

Department of Justice

Executive Office for

United States Attorneys

Washington, DC

20530

Kenneth E. Melson

Director

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In This Issue

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 1

Intr oduction

Richard Weber

Chief, Asset Forfeiture and Money

Laundering Section

Criminal Division

Money laundering constitutes a significant

threat to the safety of our communities, the

integrity of our financial institutions, and our

national security. In order to effectively address

this serious threat, the best efforts to apply and

coordinate all of the available resources of the

federal government, along with those of state and

local authorities, as well as our foreign

counterparts, must be used. The United States

Department of Justice is fully committed to using

the money laundering and asset forfeiture statutes

to the fullest extent possible. They will be used to

identify, investigate, and prosecute those who

launder the illegal proceeds of terrorists, drug

traffickers, fraud perpetrators, organized crime

organizations, and other criminals, and to seize

and forfeit their ill-gotten assets.

In recent years, crime has become

increasingly international in scope, and the

financial aspects of crime have become more

complex. This is due to the rapid advances in

technology and the globalization of the financial

services industry. Modern financial systems

permit criminals to transfer millions of dollars

instantly though personal computers and satellite

dishes. Money is laundered through currency

exchange houses, stock brokerage houses, gold

dealers, casinos, automobile dealerships,

insurance companies, trading companies, and

other sophisticated systems. Private banking

facilities, offshore banking, shell corporations,

free trade zones, wire systems, and trade financing

all have the ability to mask illegal activities. The

criminal's choice of money laundering vehicles is

limited only by his or her creativity. Ultimately,

this laundered money flows into global financial

systems where it can undermine national

economies and currencies.

Organized criminal groups transcend national

borders and extend their influence to areas of the

world far-removed from their countries of origin.

The gradual erosion of border controls in the

countries of Europe not only contributes to the

free flow of trade and commerce, but also

increases the threat of transborder financial

crimes. This internationalization of crime makes

the sharing, collating, and analysis of information,

among and within governments, essential.

Organized criminals are motivated by one

thing—profit. Greed drives the criminal. Huge

sums of money are generated through drug

trafficking, arms smuggling, white collar crime,

human trafficking, terrorism, and corruption. The

end result is that organized crime moves billions

of illegally-gained dollars into our nation's

legitimate financial systems. The success of

organized crime is based upon its ability to

launder money.

The challenges facing law enforcement in this

environment make it necessary for investigators

and prosecutors to have all the legal and

regulatory tools, as well as international legal

assistance mechanisms available to them, to keep

up with, and ahead of, those who launder the

proceeds of crime. To effectively combat such

criminal activity, law enforcement must have the

means that are at least as sophisticated, if not

more so, than the criminals.

The money laundering statutes Congress

provided, both in the Bank Secrecy Act and the

Criminal Code, are major weapons in the war

against the laundering of drug trafficking proceeds

and other serious crimes. These weapons gut the

economic base that these criminals need to operate

and stops them from continuing business as usual,

which is integral to the fight against terrorism. It

also prevents replacement of members who have

been incarcerated. Another tangential benefit is

the deterrence of crime. Greed is one of the

primary reasons for criminal activity. Asset

forfeiture removes this incentive by denying

criminals the assets illegally acquired. Not only

will they go to jail, but they will not realize any

economic gain from the crime.

Investigating and prosecuting money

laundering and forfeiting criminal assets can be a

long, arduous, and complex process. It is critical

to bear in mind, however, that it is more than a

bloodless exercise in accounting. When the crime

of money laundering is fought, organized crime is

fought. The fight against money laundering

accomplishes the following goals, among many

others.

2UNITED STATES ATTORNEYS' BULLETIN SEPTEMBER 2007

• Keeps drugs out of playgrounds and away

from children.

• Safeguards the human dignity of women and

children trafficked into forced labor and

prostitution.

• Most importantly, keeps funding out of the

hands of terrorists.

The Asset Forfeiture and Money Laundering

Section (AFMLS) releases several publications,

including the monthly Asset Forfeiture Quick

Release (new forfeiture case law) and the bi-

monthly Asset Forfeiture News. This edition of

the United States Attorneys' Bulletin supplements

those publications and is intended to provide an

overview of the money laundering statutes and a

survey of some of the tools that can be used in

financial investigations. A future edition of the

Bulletin will focus on asset forfeiture and provide

a series of articles on that topic.

The articles in this edition of the Bulletin

cover several topics, including those listed below.

• An overview of the statutes used to combat

money laundering, including the primary

money laundering statutes (18 U.S.C. §§ 1956

and 1957), the Bulk Cash Smuggling statute

(31 U.S.C. § 5332), and the Unlicensed

Money Remitting Statute (18 U.S.C. § 1960).

• Money laundering trends and techniques.

• Tools to use in financial investigations.

• The use and disclosure of Suspicious Activity

Reports in investigations.

• Criminal enforcement actions against banks

for the failure to file Suspicious Activity

Reports or to have effective Anti-Money

Laundering programs.

The AFMLS is committed to using the money

laundering statutes to the fullest extent possible

and stands ready to give whatever support and

advice is needed in prosecuting money laundering

and asset forfeiture cases.

ABOUT THE AUTHOR

Richard Weber has served as the Chief of the

Asset Forfeiture and Money Laundering Section

since March 2005. Prior to that, he was an

Assistant United States Attorney in the Eastern

District of New York, serving as Deputy Chief of

the Civil Division and Chief of the Asset

Forfeiture Unit. Rich first joined the Department

under the Attorney General's Honor Program. His

expertise in asset forfeiture and money laundering

has developed from prosecuting over 100 complex

international and domestic money laundering and

asset forfeiture cases. Among many others, he

prosecuted U.S. v. Blarek/Pellecchia, 166 F.3d

1202 (2d Cir. 1998) (interior decorators were

convicted of laundering millions of dollars of drug

proceeds for the leader of the Cali cartel and

forfeited $7 million dollars); U.S. v. Jordan

Belfort and Daniel Porush, 98-cr-00859-JG (E.D.

N.Y. Oct. 14, 2003) (where an international

securities fraud money laundering investigation

resulted in the forfeiture of $15 million dollars);

and U.S. v. Palm View Corp, 99-cr-00702-ILG

(E.D. N.Y. July 21, 2000) (which involved

gambling proceeds and the forfeiture of $6 million

dollars).a

Suspicious Activity Reports Disclosure

and Protection

Lester Joseph

Principal Deputy Chief

Asset Forfeiture and Money Laundering

Section

Criminal Division

I. Introduction

Suspicious Activity Reports (SARs) have

become one of law enforcement's most valuable

tools for detecting and investigating criminal

activity. Banks have been notifying law

enforcement of suspected criminal activity for

many years, either by submitting Criminal

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 3

Referral Forms or by checking the "suspicious"

box on the old Currency Transaction Reports

(CTRs). The modern SAR program came into

effect on April 1, 1996, when the Treasury

Department regulations requiring banks to file

SARs became effective. See 31 C.F.R. § 103.18.

Other types of financial institutions have

subsequently been required to file SARs as of the

dates shown in Figure 1. As of 2006, the financial

institutions shown in Figure 2 have filed more

than four million SARs.

The SAR system is designed to assist the law

enforcement community by requiring financial

institutions to report transactions that are

indicative of possible violations of law or

regulation. The required threshold for filing is

easily triggered, simply by suspicions, not proof,

of illegal activity. The information contained in

SARs constitutes raw allegations of the most

sensitive kind, precisely because the reported

"suspicions" are unsubstantiated and unproven.

Financial institutions file SARs with the

expectation that they will be accorded sensitive

treatment. Unnecessary disclosure of SARs could

frustrate that expectation and have a chilling

effect on both the quantity and the quality of

future SAR filings. Moreover, SARs may contain

information concerning the methods by which an

institution learned of or uncovered suspicious

activity, possibly allowing other potential

wrongdoers to take action to avoid those methods

of detection. Therefore, it is essential that law

enforcement agencies and prosecutors take

measures to ensure that the existence of a SAR or

its contents are not disclosed unless absolutely

necessary or required by law.

II. Protection and disclosure by

financial institutions

Financial institutions have a significant

interest in protecting SARs from disclosure.

Institutions are generally reluctant to publicize the

fact that they have filed SARs on their customers,

and certainly do not want their customers to know

that they have reported their activity to the

government. This reluctance is based upon both

business and safety concerns. Institutions know

that their customers would not be pleased to have

their suspicious transactions reported to the

government, and are also concerned about

retaliation from customers whose transactions

have been reported. This is especially true in

small communities where it would be obvious

which institution or employee filed the SAR.

However, to ensure that complicit or corrupt bank

officers do not tip off a customer concerning the

filing of a SAR, 31 U.S.C. § 5318(g) includes the

following provision.

(2) NOTIFICATION PROHIBITED.--

(A) IN GENERAL.--If a financial institution

or any director, officer, employee, or agent of

any financial institution, voluntarily or

pursuant to this section or any other authority,

reports a suspicious transaction to a

government agency--

(i) the financial institution, director, officer,

employee, or agent may not notify any person

involved in the transaction that the transaction

has been reported....

The SAR statutory scheme also contains a

"safe harbor" provision that protects financial

institutions from civil liability resulting from the

reporting of suspicious transactions.

(A) IN GENERAL.--Any financial institution

that makes a voluntary disclosure of any

possible violation of law or regulation to a

government agency or makes a disclosure

pursuant to this subsection or any other

authority, and any director, officer, employee,

or agent of such institution who makes, or

requires another to make any such disclosure,

shall not be liable to any person under any law

or regulation of the United States, any

constitution, law, or regulation of any State or

political subdivision of any State, or under

any contract or other legally enforceable

agreement (including any arbitration

agreement), for such disclosure or for any

failure to provide notice of such disclosure to

the person who is the subject of such

disclosure or any other person identified in the

disclosure.

31 U.S.C. § 5318(g)(3).

The major issue that courts have disagreed on

is whether the safe harbor provision is an

unqualified privilege or whether there is a good

faith belief requirement in the language of the

statute. In Lopez v. First Union Nat'l Bank, 129

F.3d 1186 (11th Cir. 1997), an account holder

filed a lawsuit against the bank alleging inter alia

violations of the Right to Financial Privacy Act

after the bank notified law enforcement that there

were unusual movements of money in certain

accounts at the bank. The court dismissed the

4UNITED STATES ATTORNEYS' BULLETIN SEPTEMBER 2007

complaint based on its conclusion that § 5318(g)

immunized the bank from liability. The Eleventh

Circuit reversed the dismissal, finding that "there

must be some good faith basis for believing [that]

there is a nexus between the suspicion of illegal

activity and the account or accounts from which

information was disclosed." Id. at 1195. The court

was concerned because the bank disclosed

information about 1,100 accounts based on

"unusual movements of money at the bank," but

may not have had a good faith basis for believing

that there was suspicious activity in each of the

1,100 accounts. Id.

The Second Circuit ruled differently two

years later in Lee v. Bankers Trust Co., 166 F.3d

540 (2d Cir. 1999), holding that there is no good

faith requirement in §5318(g). Lee, a former

managing director for Bankers Trust, brought an

action alleging that the bank defamed him through

its conduct in investigating wrongdoing with

respect to the transfer of unclaimed accounts and

through the alleged filing of a SAR after he was

asked to resign. In affirming the District Court's

granting of a motion to dismiss, the Second

Circuit stated, "The plain language of the safe

harbor provision describes an unqualified

privilege, never mentioning good faith or any

suggestive analogue thereof." Id. at 544. The court

also noted that a good faith requirement made no

sense because, if the bank sought summary

judgment, it would have to establish that the

statements in the SAR were made in good faith,

but it would be prohibited by law both from

disclosing the filing or the contents of a SAR.

Further, the court noted that an earlier draft of the

safe harbor provision included an explicit good

faith requirement, but that the requirement was

not included in the bill that was finally enacted.

Id. Note, however, that one state court has ruled

that a bank may lose its safe harbor protection if a

SAR is filed maliciously. See Bank of Eureka

Springs v. Evans, 109 S.W.3d 672 (Ark. 2003).

In addition to prohibiting institutions from

disclosing SARs to persons involved in a reported

transaction and protecting financial institutions

from civil liability resulting from filing SARs,

FinCEN has issued regulations to prevent SARs

from being disclosed during the course of

litigation:

(e) Confidentiality of reports; limitation of

liability.... [A]ny person subpoenaed or

otherwise requested to disclose a SAR or the

information contained in a SAR, except where

such disclosure is requested by FinCEN or an

appropriate law enforcement or bank

supervisory agency, shall decline to produce

the SAR or to provide any information that

would disclose that a SAR has been prepared

or filed, citing this paragraph (e) and 31

U.S.C. 5318(g)(2), and shall notify FinCEN

of any such request and its response thereto.

31 C.F.R § 103.18(e). The Federal Reserve Board

(12 C.F.R. § 208.62(j) (2006)), the Office of

Thrift Supervision (12 C.F.R. § 563.180(d)(12)

(2005)), and the Office of the Comptroller of the

Currency (12 C.F.R. § 21.11(k)) have issued

essentially identical regulations that apply

specifically to the institutions under their

respective jurisdictions. SARs have been sought

by litigants in a variety of civil cases. In many of

these cases, the government has intervened or

filed briefs to prevent the disclosure of the SARs,

and courts have generally been very supportive of

the government's efforts to protect SARs from

disclosure.

Courts have noted that the disclosure of a

SAR could compromise an ongoing law

enforcement investigation, provide information to

a criminal wishing to evade detection, or reveal

the methods by which banks are able to detect

suspicious activity. See, e.g., Cotton v.

PrivateBank and Trust Co., 235 F. Supp. 2d 809,

815 (N.D. Ill. 2002); Youngblood v. Comm'r,

2000 WL 852449, *11-12 (C.D. Cal. Mar. 6,

2000). Courts have also observed that a bank may

be reluctant to prepare a SAR if it believed that its

cooperation may cause customers to retaliate. See,

e.g., Cotton, 235 F. Supp. 2d at 815. Courts have

also expressed concern that the disclosure of a

SAR could harm the privacy interests of innocent

people whose names may be mentioned. See, e.g.,

id.; Weil v. Long Island Sav. Bank, 195 F. Supp.

2d 383, 388 (E.D.N.Y.2001) ("the production of

SARs by a bank in response to a subpoena would

invariably increase the likelihood that the person

involved in the transaction would discover or be

notified that the SARs had been filed") (internal

citations and quotations omitted); Whitney Nat'l

Bank v. Karam, 306 F. Supp. 2d 678, 680-81

(S.D. Texas 2004).

For example, in Weil v. Long Island Sav.

Bank, 195 F. Supp. 2d 383 (E.D.N.Y. 2001),

borrowers sued the defendant bank in connection

with a purported illegal kickback scheme

involving the CEO. The plaintiffs moved to

compel production of any SAR regarding the

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 5

CEO that had been filed with the Office of Thrift

Supervision. The court held that 12 C.F.R.

§ 563.180(d)(12) "prohibit[ed] the disclosure of

SARs or their content, even in the context of

discovery in a civil lawsuit, and that the enabling

legislation... [was] specific enough to support that

purpose." The court further found that the statute

created an unqualified discovery and evidentiary

privilege that could not be waived by the

reporting financial institution. Id. at 389.

In Gregory v. Bank One, Indiana, N.A., 200 F.

Supp. 2d 1000 (S.D. Ind. 2002), a bank that was a

defendant in a civil lawsuit sought to disclose its

own filing of a SAR. The plaintiff was a bank

employee who asserted defamation and related

claims arising from accusations of theft. The bank

sought leave of court to submit, under seal for in

camera review, any information that it might have

reported pursuant to 31 U.S.C. § 5318(g)(2) in

support of an affirmative safe harbor immunity

defense. While the court initially granted the

request, upon reconsideration, it vacated its order

and returned the materials produced. The court

explained.

There is no provision in the Act or the Rule

allowing a court-order exception to the

unqualified privilege. [citation omitted] Thus,

the Court is not authorized to order or to

permit Bank One to make any disclosure,

sealed or unsealed, of any information which

is privileged under the Act or the Rule,

whether in the form of a copy of an SAR or

other report.... Quite the opposite: under the

clear, unambiguous terms of the Act and the

Rule, courts have an obligation to prevent

disclosures of privileged information.

Id. at 1003.

Although the regulations issued by the federal

regulators are broader in their prohibitions against

disclosure of the existence or the content of a

SAR than is the statute, the regulations have been

held to be consistent and in harmony with the

enabling statute. In Cotton v. PrivateBank & Trust

Co., 235 F. Supp. 2d 809 (N.D. Ill. 2002), during

the course of civil litigation concerning an estate,

PrivateBank sought the disclosure of certain

SARs from CIBC World Market Corp (CIBC).

PrivateBank argued that disclosure of the SARs

by CIBC would not violate the statutory scheme

because 31 U.S.C. § 5318(g) prohibits disclosure

of a SAR only to any person involved in the

transaction. PrivateBank contended that the

regulations are inconsistent with the statute and,

therefore, unenforceable. The court, citing

Gregory and Weil, disagreed, and held that the

regulations were consistent with the statute and

should be enforced. Id. at 815.

III. Disclosure of supporting documents

Courts have, however, made a distinction

between disclosure of SARs and disclosure of the

supporting documents underlying the SAR. Under

the regulations, the supporting documents

underlying the SAR are not to be filed with the

SAR, but are to be retained by the financial

institution and treated as if they were filed with

the SAR.

(d) Retention of records. A bank shall

maintain a copy of any SAR filed and the

original or business record equivalent of any

supporting documentation for a period of five

years from the date of filing the SAR.

Supporting documentation shall be identified,

and maintained by the bank as such, and shall

be deemed to have been filed with the SAR. A

bank shall make all supporting documentation

available to FinCEN and any appropriate law

enforcement agencies or bank supervisory

agencies upon request.

31 C.F.R. § 103.18(d).

The courts have generally held that the

prohibition against a bank's disclosure of the

existence or contents of a SAR does not apply to

disclosure of any supporting documents. See, e.g.,

Weil v. Long Island Sav. Bank, 195 F. Supp. 2d

383, 389 (E.D.N.Y. 2001). "Nothing in the Act or

regulations prohibits the disclosure of the

underlying factual documents which may cause a

bank to submit a SAR." Cotton, 235 F. Supp. 2d

at 814. Furthermore, those underlying documents

do not become confidential by reason of being

attached or described in a SAR. For example, if a

wire transfer of funds is described in a SAR as a

suspicious activity, the wire transfer transaction

remains subject to discovery. Therefore, the court

in Cotton held that "the better approach prohibits

disclosure of the SAR while making clear that the

underlying transaction such as wire transfers,

checks, deposits, etc., are disclosed as part of the

normal discovery process." Id.

The Cotton court, however, distinguished

between two types of supporting documents.

The first category represents the factual

documents which give rise to suspicious

conduct. These are to be produced in the

6UNITED STATES ATTORNEYS' BULLETIN SEPTEMBER 2007

ordinary course of business because they are

business records made in the ordinary course

of business. The second category is

documents representing drafts of SARs or

other work product or privileged

communications that relate to the SAR itself.

These are not to be produced because they

would disclose whether a SAR has been

prepared or filed.

Id. at 815. In United States v. Holihan, 248 F.

Supp. 2d 179 (W.D.N.Y. 2003), the defendant

bank employee was charged with embezzlement.

As part of her defense, the defendant served a

subpoena on the bank for production of complete

personnel files of the bank's investigator and other

bank employees. The bank opposed the request of

personnel files insofar as it would require the

production of any SARs filed against any other

bank employee working at the branch during the

relevant time period. The court, citing Gregory

and Cotton, ordered the disclosure of any

supporting documents relating to a SAR in the

personnel file of any relevant bank employee at

the time of the embezzlement, provided that such

documentation did not disclose either the

existence or contents of a SAR. Id. at 187.

The case of Union Bank of California v.

Superior Court of Alameda County, 130 Cal. App.

4th 378 (2005), further opined on the term

"supporting documentation." Union Bank was

sued by several investors who lost money in a

Ponzi scheme. The fraud victims alleged that

Union Bank was complicit in the operation of the

scheme by allowing the perpetrators to set up a

sham trust account that was used to transfer

millions of dollars to offshore accounts. During

the course of the litigation, the victims sought

permission from the Office of the Comptroller of

the Currency (OCC) to allow Union Bank to

produce certain SARs it had filed during the

relevant time frame. The OCC denied this request.

During discovery, the victims learned that Union

Bank had in place certain internal procedures and

forms to identify, register, and describe what

might constitute suspicious activity, particularly

an internal form (Form 244) which is filled out by

bank personnel to report suspicious activity. The

victims requested the Forms 244 filed within the

bank. The trial court ordered production of all

such Forms 244, whereupon Union Bank filed a

petition seeking a writ of mandate with the

appellate court.

The California Appellate Court noted that "a

draft SAR or internal memorandum prepared as

part of a financial institution's process for

complying with federal reporting requirements is

generated for the specific purpose of fulfilling the

institution's reporting obligation." The court found

that "[t]hese types of documents fall within the

scope of the SAR privilege because they may

reveal the contents of a SAR and disclose whether

a SAR has been prepared or filed." (Citation

omitted). Unlike transactional documents, which

are evidence of suspicious conduct, draft SARs

and other internal memoranda or forms that are

part of the process of filing SARs are created to

report suspicious conduct. Id. at 391. This led the

court to find that the Forms 244 are privileged

documents that should not be disclosed.

A bank's internal procedures may include the

development and use of preliminary reports

subject to various quality control checks

before the bank prepares the final SAR that

will be filed. Revealing these preliminary

reports, the equivalent of draft SAR's would

disclose whether a SAR had been prepared.

Id. at 392. Accordingly, the court held that the

SAR privilege extends to documents prepared by

a bank "for the purpose of investigating or

drafting a possible SAR." Id. at 394.

IV. Disclosure by regulators

The Union Bank case referred to the fact that

the fraud victims initially sought permission from

the OCC to allow Union Bank to produce the

SARs. The OCC's regulations prohibit financial

institutions under its jurisdiction from disclosing

SARs, and require that persons seeking disclosure

of nonpublic documents, such as SARs, submit a

request to the Director of the OCC's Litigation

Division in Washington, D.C. See 12 C.F.R.

§ 4.34(a). The request must provide sufficient

detail to apprise the OCC of the nature of the

litigation, and the request must evidence that "the

information is relevant to the purpose for which it

is sought," that "other evidence reasonably suited

to the requestor's needs is not available from any

other source," and that "the need for the

information outweighs the public interest

considerations in maintaining the confidentiality

of the OCC information and outweighs the burden

on the OCC to produce the information." 12

C.F.R. § 4.33(a)(iii)(A)-(C). Finally, the OCC,

alone, has discretion to deny these requests "based

on its weighing of all appropriate factors

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 7

including the requestor's fulfilling of the

requirements enumerated in § 4.33." 12 C.F.R.

§ 4.35(a).

Litigants, in some cases, have alleged that the

OCC's denials of their requests for SAR

information were arbitrary and capricious because

they were not analyzed in conjunction with the

regulatory requirements outlined above. One such

complaint arose in the case of Wuliger v. Office of

the Comptroller of Currency, 394 F. Supp. 2d

1009 (N.D. Ohio 2005). In Wuliger, an escrow

agent used investors' money to fund several bank

and brokerage accounts. After the investors

suffered monetary losses, plaintiff was appointed

as Receiver. In conjunction with his role, plaintiff

submitted a request to the OCC for the release of

SARs, all supporting documentation, and all

correspondence, memos, or other documents

pertaining to the investment of these funds. The

OCC responded to the request by outlining the

public policy in favor of maintaining SAR

confidentiality, relying on the regulations

requiring confidentiality, and citing to cases

denying disclosure of SARs in the course of

discovery proceedings. The court ruled that the

OCC acted properly and that its decision could not

be deemed arbitrary or capricious, even though

the OCC did not conduct any analysis as to

whether the plaintiff satisfied the burden

established by its regulations. Id. at 1018.

The Eastern District of Louisiana, however,

reached a contrary result in the case of BizCapital

Bus. & Indus. Dev. Corp. v. OCC, 406 F. Supp.

2d 688 (E.D. La. 2005). BizCapital involved a

SAR disclosure request and OCC response that

were virtually identical to those analyzed in the

Wuliger case. When the OCC denied BizCapital's

request for disclosure, BizCapital filed suit in

federal district court, seeking review of the OCC's

final administrative decision. The district court

granted BizCapital's cross-motion for summary

judgment, rejecting the OCC's argument that it

was absolutely prohibited from revealing SARs to

third parties and determining that the OCC

improperly failed to weigh the factors outlined in

its own regulations prior to denying BizCapital's

request. Id. at 692-93. The court ordered the OCC

to submit any responsive SAR to the court for an

in camera review so that a determination could be

made regarding the appropriate extent of

disclosure. Id. at 697-98. The OCC appealed the

decision on the ground that the district court

should have remanded the case to the OCC for

further consideration, rather than ordering the

disclosure of the SAR. The Fifth Circuit agreed

and remanded the case to the district court.

BizCapital Bus. & Indus. Dev. Corp. v. OCC, 467

F.3d 871 (5th Cir. 2006). This case leaves open

the possibility that, at least in some cases, a civil

litigant may be able to obtain disclosure of a SAR

through a federal regulator during the course of

civil litigation.

V. Disclosure by the government

Section 5318(g)(2)(A)(ii) addresses the

disclosure of SARs by government employees.

(ii) no officer or employee of the Federal

Government or of any State, local, tribal or

territorial government within the

United States, who has any knowledge that

such report was made may disclose to any

person involved in the transaction that the

transaction has been reported, other than as

necessary to fulfill the official duties of such

officer or employee.

While this provision further expresses the notion

that SARs are confidential and should not be

disclosed without authority or good cause, it does

not begin to address the myriad of situations that

prosecutors and investigators encounter during the

course of a criminal investigation and prosecution.

On its face, the restriction is limited to disclosure

of the SAR or information related to the subject of

the SAR, and excludes situations that are

necessary to fulfill the employee's official duties.

This leaves open numerous questions, such as the

following.

• How should prosecutors deal with SARs

during the course of carrying out their

discovery obligations?

• How can investigators and prosecutors use

SARs to support applications for search

warrants and seizure warrants?

• How can investigators and prosecutors share

SARs with other agents during the course of

an investigation?

While there are no statutes or regulations that

directly address these questions, the short answer

is that every effort should be made by

investigators and prosecutors to protect SARs

from disclosure. As mentioned above, release of a

SAR may jeopardize an ongoing investigation,

alert criminals, disclose bank methods to detect

suspicious activity, or alienate customers. Cotton

8UNITED STATES ATTORNEYS' BULLETIN SEPTEMBER 2007

v. PrivateBank and Trust Co., 235 F. Supp. 2d

809, 815 (N.D. Ill. 2002).

Financial institutions are prohibited from

disclosing SARs, and the financial regulators

rigorously seek to protect SARs from being

disclosed. It is only fair—and consistent with the

spirit of the SAR program—that law enforcement

does everything within its power to protect SARs

from being disclosed. Therefore, the existence or

contents of a SAR should only be disclosed when

absolutely necessary, and only after there has been

discussion with supervisors in the U.S. Attorneys'

Offices or with the Criminal Division.

In 2003, the Department of Justice's

(Department) Criminal Division issued guidance

on the "Disclosure of Suspicious Activity

Reports." This guidance is reproduced in Figure 3.

The premise of the guidance is that "[l]aw

enforcement agencies and prosecutors should

consider SARs similar to confidential source

information that, when further investigated, may

produce evidence of criminal activity," and that,

"[c]onsistent with the treatment accorded

confidential source information, the existence of

SARs... should not normally be disclosed to

persons outside of the law enforcement

community." The guidance also notes the

distinction between SARs and the records

underlying the SAR, and states, "[b]ecause the

underlying documents prove the transaction, and

the SAR does not, it should rarely be necessary to

use a SAR in the prosecution's case."

In accordance with this premise, these general

guidelines should be followed.

• SARs should not be referenced in affidavits

for search warrants, Title IIIs, or seizure

warrants. The underlying bank records should

be sufficient to establish the basis for the

search, seizure, or electronic surveillance.

• SARs should not be referenced in motions or

responses to motions.

• SARs should not be referenced in indictments,

informations, or any other charging

documents.

• SARs should not be shown to subjects or

witnesses during the course of interrogations.

• SARs should not be referenced in press

releases.

There are certain situations where a

prosecutor may have an obligation to disclose a

SAR, or more likely, information included within

a SAR, such as the following.

• [The SAR] contains exculpatory or potential

impeachment information that a prosecutor is

constitutionally obligated to disclose.

• [The SAR] is a document, or contains

information, required to be disclosed under

Rule 16 of the Federal Rules of Criminal

Procedure or under the Jencks Act, 18 U.S.C.

§ 3500.

However, even in these situations, it should

not be necessary to disclose the SAR, itself. The

SAR is not the critical information. It is the

information in the SAR that is relevant. Thus, if a

SAR contains potential exculpatory information,

the relevant information can, for example, be

provided to defense counsel in a letter. In any

case, prosecutors should not disclose a SAR,

either in its entirety or in redacted form, before

consulting with their supervisors, the Criminal

Division, and FinCEN's Office of General

Counsel. The disclosure of a SAR in any

particular case can have consequences beyond the

scope of that case.

VI. Sharing of SARs with other

government personnel

The Department encourages the development

of interagency SAR teams to review SARs and

coordinate resulting investigations. There are

restrictions, however, on the sharing of SARs and

SAR information among law enforcement

personnel, pursuant to applicable law and policy,

aimed at protecting the integrity of these sensitive

reports. There are significant privacy issues that

arise from the use and disclosure of SARs.

FinCEN, in its role as the administrator of the

Bank Secrecy Act (BSA), is the central point of

dissemination of BSA information. In this role,

FinCEN is responsible for ensuring that SARs are

used appropriately and in a manner designed to

respect the significant privacy interests that are at

stake. In furtherance of this mission, in June 2004,

FinCEN issued "Re-Dissemination Guidelines for

Bank Secrecy Act Information" which established

the procedures for the re-dissemination of BSA

information by appropriate users of the data.

These Re-Dissemination Guidelines were revised

and reissued in December 2006.

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 9

The December 2006 Re-Dissemination

Guidelines state that, subject to certain conditions,

a federal, state, or local government agency may

re-disseminate BSA information to another

government agency in the following situations,

without obtaining the approval of FinCEN.

• In support of a financial institution examination,

law enforcement investigation, or prosecution.

• In the conduct of intelligence or

counterintelligence activities, including analysis,

to protect against international terrorism.

The conditions to this rule, in part, include the

following.

• The disclosing federal, state, or local

government agency must obtain a written

acknowledgment of the receiving agency,

reflecting its understanding that further

dissemination of the BSA information is

prohibited without the prior approval of

FinCEN.

• The disclosing federal, state, or local

government agency must ensure that each

item of BSA information shared contains a

specific warning statement which states that

the information cannot be further released

without prior approval from FinCEN.

• The disclosing federal, state, or local

government agency must keep a record of

each disclosure of BSA information.

The December 2006 Re-Dissemination

Guidelines further state that BSA information can

be re-disseminated, without first obtaining the

approval of FinCEN, in the following specific

situations.

• In limited circumstances, a federal prosecutor

may disclose BSA information in the course

of a judicial proceeding without first

obtaining the approval of FinCEN. (See the

discussion of the Department SAR Guidance,

supra.)

• The federal bank supervisory agencies each

have concurrent authority to re-disseminate a

SAR that is filed with FinCEN by a bank or a

banking organization.

• U.S. Customs and Border Protection and U.S.

Immigration and Customs Enforcement have

concurrent authority to re-disseminate a

Currency and Monetary Instrument Report.

As the above is a brief synthesis of the Re-

Dissemination Guidelines, it is imperative that the

guidelines be reviewed prior to the sharing of any

BSA information among law enforcement

personnel. It is important that prosecutors and law

enforcement agents be familiar with, and

understand, these guidelines. The SAR Re-

Dissemination Guidelines are available from

FinCEN, or from the Asset Forfeiture and Money

Laundering Section, or the Fraud Section, of the

Criminal Division.

VII. Conclusion

SARs are one of the most valuable tools to

proactive law enforcement. They allow the

government to identify targets, trends, and related

criminal schemes. They allow law enforcement

agencies to coordinate and prioritize

investigations, thereby allowing the government

to use its limited resources more efficiently. In

addition, they provide a partnership between law

enforcement and the financial services industry.

In order to foster and develop this partnership,

prosecutors and investigators must safeguard

these sensitive tools and protect them from

disclosure. Financial institutions also value

feedback from law enforcement on the utility of

the SARs they file. Financial institutions spend a

considerable amount of resources on systems to

identify and report suspicious activity. They are

obligated to do this under the law, but most

institutions are eager to support law enforcement's

efforts in fighting crime. When they provide

substantial assistance, their efforts should be

recognized. Prosecutors and agents are

encouraged to reach out to the financial

community to explain the government's mission,

discuss recent law enforcement trends and cases,

and encourage the efforts of the financial

community in fighting crime and terrorism.

10 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

ABOUT THE AUTHOR

Lester M. Joseph is the Principal Deputy Chief

in the Asset Forfeiture and Money Laundering

Section (AFMLS). He has been a Deputy Chief

since the Money Laundering Section was created

in 1991. He became Principal Deputy Chief in

January 2002. Mr. Joseph joined the Department

in 1984 as a Trial Attorney in the Organized

Crime and Racketeering Section. From 1981 to

1984, he was an Assistant State's Attorney in

Cook County (Chicago), Illinois.a

Type of Financial Institution Date of SAR Requirement 31 C.F.R. Cite

Banks April 1, 1996 103.18

Money Service Business January 1, 2002 103.20

Broker-Dealers December 30, 2002 103.19

Casinos March 25, 2003 103.21

Futures Commission

Merchants

May 18, 2004 103.17

Insurance Companies May 3, 2006 103.16

Mutual Funds Nov. 1, 2006 103.15

Figure 1

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 11

Number of Suspicious Activity Report Filings by Year

Form 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Depository

Institution

62,388 81,197 96,521 120,505 162,720 203,538 273,823 288,343 381,671 522,655 567,080

Money Services

Business

- - - - - - 5,723 209,512 296,284 383,567 496,400

Casinos and Card

Clubs

85 45 557 436 464 1,377 1,827 5,095 5,754 6,072 7,285

Securities &

Futures Industries

- - - - - - - 4,267 5,705 6,936 8,129

Subtotal

62,473 81,242 97,078 120,941 163,184 204,915 281,373 507,217 689,414 919,230 1,078,894

Total 4,205,961

Figure 2

12 United States Attorneys' Bulletin

Disclosure of Suspicious Activity Reports (SARs)

From: Joshua R. Hochberg

Chief, Fraud Section

Criminal Division

U.S. Department of Justice

July 8, 2003

Suspicious Activity Reports (SARs) provide valuable information that can accelerate the

investigation and development of cases for prosecution and provide significant leads for

investigations and intelligence. The routine or unnecessary disclosure of SARs or even of

their existence undermines the confidentiality surrounding their filing.

Certain financial institutions operating in the United States are required to file reports of known

or suspected criminal conduct that takes place at or was perpetrated against the financial

institutions. These reports, known as Suspicious Activity Reports or SARs, are filed with the

Financial Crimes Enforcement Network (FinCEN), a bureau of the United States Department of

the Treasury. SARs are made available to the law enforcement community for use in

investigations, prosecutions and related law enforcement activities.

The SAR system was designed to assist the law enforcement community by requiring financial

institutions to report transactions that are indicative of possible criminal activity. The required

threshold for filing is easily triggered, simply by suspicion, not proof, of criminal activity. The

information contained in SARs constitutes raw allegations of the most sensitive kind, precisely

because the reported suspicions are unsubstantiated and unproved.

Because financial institutions file SARs with the expectation that they will be accorded sensitive

treatment, unnecessary disclosure of SARs could frustrate that expectation and have a chilling

effect on both the quantity and the quality of future SAR filings. Moreover, SARs may contain

information concerning the methods by which an institution learned of or uncovered suspicious

activity, possibly allowing other potential wrongdoers to take action to avoid those methods of

detection. Law enforcement agencies and prosecutors should consider SARs similar to

confidential source information that, when further investigated, may produce evidence of

criminal activity.

Consistent with the treatment accorded confidential source information, the existence of SARs

relating to conduct being investigated, as well as the content of SARs, should not normally be

disclosed to persons outside the law enforcement community. Disclosure of a SAR should be

distinguished from disclosure of the records constituting the transactions discussed in a SAR,

such as a wire transfer record, which can be treated as an ordinary piece of evidence. Because

the underlying documents prove the transaction, and the SAR does not, it should rarely be

necessary to use a SAR in the prosecution's case.

Figure 3

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 13

Special Note—Disclosure of SARs and SAR Information to Subjects

Given the nature of the information contained in SARs and the purposes for which such

information is collected, there are strict statutory restrictions governing disclosures of SARs, or

the fact that SARs have been filed, when these disclosures are made to persons involved in the

reported transactions. These provisions recognize that there will be instances in which the

disclosure of SARs or their contents is unavoidable due to constitutional or statutory discovery

obligations placed on prosecutors.

As amended by the USA PATRIOT ACT (Pub. L. 107-56), 31 U.S.C. 53 18(g) states in relevant

part:

(2) NOTIFICATION PROHIBITED -

(A) IN GENERAL --If a financial institution or any director, officer, employee, or agent of

any financial institution, voluntarily or pursuant to this section or any other authority, reports

a suspicious transaction to a government agency

(i) the financial institution, director, officer, employee, or agent may not notify any person

involved in the transaction that the transaction has been reported; and

(ii) no officer or employee of the Federal Government or of any State, local, tribal, or

territorial government within the United States, who has any knowledge that such report was

made may disclose to any person involved in the transaction that the transaction has been

reported, other than as necessary to fulfill the official duties of such officer or employee.

Under 31 U.S.C. 53l8(g)(2), no government official may disclose a SAR to a person involved in

the transaction "other than as necessary to fulfill the official duties of such officer or employee."

For example. it may be necessary for a prosecutor to disclose a SAR in situations in which the

SAR:

• contains exculpatory or potential impeachment information that a prosecutor is

constitutionally obligated to disclose; or

• is a document or contains information required to be disclosed under Fed. R. Crim. P. 16

or the Jencks Act, 18 U.S.C. 3500.

In these and other instances in which a prosecutor believes that disclosure of a SAR to the

defense may be compelled by constitutional, statutory or regulatory authority, the prosecutor

should consult with supervisory personnel in the office to consider whether the SAR or the

material included within the report must be disclosed to the defense, or whether it may be

withheld, redacted, limited by protective order or otherwise protected from disclosure.

Attorneys in the Criminal Division's Fraud Section, John Arterberry, Barry Goldman and Jack

Patrick (202-514-0890), and Asset Forfeiture and Money Laundering Section, Lester Joseph

(202-616-0593), are available for consultation on SAR disclosure issues. Because disclosure of a

SAR may affect other investigations or cases and because FinCEN is charged with responsibility

for enforcing the SAR laws and regulations, FinCEN's Office of Chief Counsel, 703-905-3590,

should be given notice if an office decides to disclose a SAR.

Figure 3 Cont'd

14 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

Money Laundering Trends

Emery Kobor

Policy Advisor

Office of Terrorist Financing and Financial

Crimes

Department of the Treasury

I. Introduction

Combating money laundering is a massive

and evolving challenge which requires a clear and

thorough understanding of the various trends and

techniques being used by criminals to launder

their illicit funds. These trends range from well-

established techniques for integrating dirty money

into the financial system to modern innovations

that exploit global payment networks, as well as

the Internet. New and innovative methods for

electronic cross-border funds transfer are

emerging globally. These new payment tools

include extensions of established payment

systems, and new payment methods that are

substantially different from traditional

transactions. New payment methods raise

concerns about money laundering and terrorist

financing because criminals can adjust quickly to

exploit new opportunities that often allow

anonymous high value transactions with little or

no paper trail or legal accountability. This article

is a digest of thirteen different methodologies

which were identified in the 2005 Money

Laundering Threat Assessment as being used by

criminals to launder money in the United States,

available at http://www.treas.gov/offices/

enforcement/pdf/mlta.pdf.

II. Banks and other depository financial

institutions

In the United States, only banks and other

depository financial institutions are allowed to

hold financial deposits and provide direct access

to those deposits through the use of paper checks

and various bank-to-bank electronic payment

networks. Although Money Services Businesses

(MSBs) offer an alternative to banks for many

financial services, they have to use a depository

financial institution to hold their deposits, clear

checks, and settle transactions.

Once illicit funds are in a bank, the money

can be transferred quickly from account to

account, leading to a tangled web of transactions

that make it difficult to trace the path or identify

the ultimate owner of the money. Criminals open

both consumer and business accounts to move

illicit cash into the banking system. One technique

to avoid a Currency Transaction Report (CTR)

being filed is to use "smurfs,"—students,

travelers, or other accomplices—to open accounts

in a number of banks, then "structure" cash

deposits into the accounts by keeping each deposit

below the $10,000 CTR threshold. The money

launderer will periodically draw down the

accounts, transferring funds to other accounts or

money laundering vehicles, domestically and

offshore.

Bank accounts opened in the name of a

business or other legal entity can be useful to

disguise the beneficial owner of the account and

the true nature of the funds that move through the

account. Retail businesses that ring up cash

transactions and make nightly deposits can be

used as a front to disguise illicit cash added to the

day's deposit. Bank accounts held by shell

companies and trusts often do not require the

disclosure of beneficial ownership and can mask

illicit money movement as trade or investment

transactions.

III. Correspondent banking

Despite rapid developments in banking

technology, domestic bank payment networks

around the world generally do not connect with

one another. To move money across borders, a

U.S. bank often has to hold an account with a

bank overseas, a relationship known as

correspondent banking. When a U.S. bank

customer wants to send a cross-border wire

transfer, the bank transfers funds from the

correspondent account it holds in the recipient

country.

Correspondent accounts and "payable

through" accounts create opportunities to use a

U.S. or foreign bank without the bank always

knowing the true payment originator. A "payable

through" account at a U.S. bank involves a foreign

bank holding a checking account at the U.S.

institution. The foreign bank can issue checks to

its customers, allowing them to make payments

from the U.S. account. A variation on the

"payable through" account is "nesting," in which

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 15

foreign banks open correspondent accounts at

U.S. banks, but then solicit other foreign banks to

use the account. This results in an exponential

increase in the number of individuals with access

to a single account at a U.S. banking institution.

As cross-border wire transfers come under

increased scrutiny and regulation, criminals are

using paper checks, money orders, and cashier's

checks, as an effective alternative. These more

traditional payment instruments take longer to

clear when traveling outside the United States, but

often receive less scrutiny.

Money launderers can transfer large dollar

amounts by writing a number of checks or buying

a number of money orders at various U.S.

locations, with each payment below the CTR

reporting threshold. The dollar-denominated

payments are mailed or transported to

accomplices overseas who deposit the checks and

money orders in foreign bank accounts. Because

these are dollar-denominated payments, the

foreign banks that receive them have to send them

back to the United States for deposit in their U.S.

correspondent accounts. Some banks handle as

many as five to seven million checks a day.

Processing is done as efficiently as possible,

making it difficult to aggregate related payments

or scrutinize individual payments for evidence of

money laundering.

IV. Money services businesses

MSBs provide an alternative to the banking

system, offering a full range of financial products

and services without the same level of regulation

and supervision imposed on banks and other

depository financial institutions. Under the Bank

Secrecy Act (BSA), 12 U.S.C. §§ 1251-1259,

MSBs include the following.

• Currency exchangers.

• Check cashers.

• Issuers of traveler's checks, money orders, or

stored value.

• Sellers or redeemers of traveler's checks,

money orders, or stored value.

• Money transmitters.

Unlike banks, which are obligated to verify

customer identification at account opening, MSBs

do not hold customer accounts and are currently

obligated, under federal law, to verify and record

customer identification only when selling $3,000

or more of money orders or travelers' checks, or

conducting a money transfer of $3,000 or more.

Most MSBs are required to report suspicious

activity, however, excluded from that requirement

are check cashers and sellers and redeemers of

stored value.

Many MSBs, including the vast majority of

money transmitters in the United States, operate

through a system of agents. Agents are not

required to register with the Financial Crimes

Enforcement Network (FinCEN), but are required

to establish anti-money laundering (AML)

programs and to comply with certain record

keeping and reporting requirements.

A. Currency exchangers

Currency exchangers, also referred to as

currency dealers, money exchangers, casas de

cambio, and bureaux de changes, exchange bank

notes of one country for that of another. Less than

ten states currently regulate this activity, which

makes it the least regulated MSB category.

Casas de cambio are currency exchange

houses specializing in Latin American currencies.

In the United States, more than 1,000 casas de

cambio are located along the border from

California to Texas. Some casas de cambio exist

primarily for money laundering. They take in

illicit cash from many clients and then deposit the

money under the name of the exchange house.

Seized documents in raids conducted by the

Venezuelan Guardia Nacional in the state of

Tachiria revealed that a number of casas de

cambio were laundering drug proceeds from the

United States and routing them through Venezuela

to Colombia to avoid the relatively high tariff on

U.S. currency in Colombia. Many of the casas de

cambio involved in the money laundering process

have access to U.S. dollar checking accounts

through correspondent accounts held by major

banks in Venezuela.

B. Check cashers

Money launderers use check-cashing

businesses to cash checks that were written to

small businesses, but which the launderer

purchased with illicit cash. Small businesses

benefit by receiving immediate cash, avoiding

fees, passing on the risk of bad checks, and

potentially evading income taxes. Money

launderers sometimes purchase check-cashing

businesses outright so that checks can be

deposited directly into the launderer's bank

account. The lack of record keeping or suspicious

16 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

activity report (SAR) filing requirements may

hinder law enforcement attempts to trace illicit

proceeds through this channel.

C. Money orders

Money orders are attractive to money

launderers because they can be issued in large

dollar denominations, are less bulky than cash,

and are issued anonymously for amounts under

$3,000. A common money laundering technique is

to structure multiple money order purchases just

under the $3,000 customer-identification

threshold. It is estimated that more than 830

million money orders, worth more than $100

billion, are issued annually, with 80% issued by

the U.S. Postal Service (USPS), Western Union,

and MoneyGram International. The remainder are

issued by small regional companies.

Money order issuers, other than USPS, rely

largely on licensed agents, rather than employees.

While the parent firm is responsible for activity

across their agent network, it is not required to

review individual SARs, and some firms

specifically discourage their agents from

submitting SARs to the parent firm. Western

Union and MoneyGram agents issue more than 50

percent of all money orders in the United States,

yet filed only 1 percent of the SARs from October

1, 2002 through December 31, 2004 that involved

money orders and money laundering. During the

same period USPS, which issues approximately

one-quarter of all money orders in the

United States, filed 93 percent of the SARs related

to money laundering via money orders.

D. Stored value

Stored value, or prepaid cards, operate within

either an "open" or "closed" system. Open system

cards can be used to make purchases from

merchants or to get cash at ATMs that connect to

the global payment networks, specifically those

operated by Visa and MasterCard. Open system

card programs, although issued through banks and

other depository institutions, generally do not

require a bank account or face-to-face verification

of the cardholder's identity. Funds can be prepaid

by one person, with someone else in another

country accessing the cash via ATM. Open system

prepaid cards typically can have additional funds

added on an ongoing basis. There are no

regulatory guidelines that address customer

identification, record keeping, or reporting

requirements, regarding open system prepaid card

accounts.

Closed system cards can only be used to buy

goods or services from the merchant or service

provider issuing the card. Examples of closed

system cards include store-specific retail gift cards

and mass transit system cards. These cards may be

limited to the initial value posted to the card or

may allow the card holder to add value.

The target markets for prepaid cards include

teenagers, people without bank accounts, adults

unable to qualify for a credit card, and immigrants

sending cash to family outside the United States.

Depending on the safeguards employed by the

card-issuing bank and its support network, open

system prepaid cards may provide an anonymous

way to store, transport, and access, illicit cash

globally. Closed system cards, primarily store gift

cards, present more limited opportunities and a

correspondingly lower risk as a means to move

monetary value out of the country. Nevertheless,

federal law enforcement agencies report both

categories of stored value cards are used as

alternatives to smuggling physical cash.

E. Money transmitters

The volume and accessibility of money

transmitters makes them attractive vehicles to

money launderers. Western Union runs the largest

nonbank money transmitter network, with more

than 245,000 agent locations in 195 countries and

territories.

Money transmitters are obligated to verify and

record customer identification only when sending

a wire of more than $3,000. To evade that

threshold, customers can divide up their funds

transfers among several wires and several

different money transmitters.

Online payment services, including dealers in

digital precious metals, are another option for

cross-border funds transfers. These intermediaries

operate via the Internet and facilitate funds

transfers for individuals and businesses by using a

variety of payment methods. The forms of

payment a service provider accepts and uses to

pay out to recipients varies by service provider.

Those willing to accept and pay out using

anonymous forms of payment (cash, money

orders, nonbank wires, and some prepaid cards)

create a potential money laundering threat.

U.S. citizens can access payment services

online that are based outside of the United States

and transfer funds either electronically or by mail.

Some online payment services exist to facilitate

transactions for online gambling and adult content

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 17

that U.S.-based money transmitters typically will

not service. Online payment services that offer

immediate final settlement with no recourse are

often used for illegal transactions and are popular

with fraudulent investment schemes.

V. Casinos

As high-volume cash businesses, casinos are

susceptible to money laundering, as well as many

other financial crimes, and were the first nonbank

financial institutions required to develop AML

compliance programs. In addition to gaming,

casinos offer a variety of financial services

including credit, funds transfers, check cashing,

and currency exchange.

Tribal casinos are moving rapidly from

relative obscurity within the U.S. casino industry

to a position of prominence. Collectively, tribal

casinos took in $18.5 billion in revenue in

2004—twice the amount generated by Nevada

casinos. There are 567 federally recognized

American Indian tribes (half are in Alaska), with

gaming facilities in twenty-eight states.

Money laundering schemes involving casinos

usually start with the purchase of casino chips

using illicit cash. The chips then can be used in

the following ways.

• Cashed in for a casino check or wire transfer

for deposit into a bank account.

• Used as a form of currency for goods and

services, particularly illegal narcotics, so that

others ultimately cash in the chips.

• Used for gambling in the hope of generating

certifiable winnings.

While criminals will structure transactions at

banks and MSBs to avoid transaction records or

reports that draw attention to them, they use

casinos for the opposite purpose. Having a CTR

filed on a casino payout has the effect of making

the money appear legitimate. Criminals also use

casinos to launder counterfeit money, as well as

large currency notes that would be conspicuous

and difficult to use elsewhere, and which may be

marked by undercover law enforcement officers.

VI. Bulk cash smuggling

Increasingly effective AML policies and

procedures at U.S. financial institutions may be

responsible for money launderers moving illicit

cash out of the country to jurisdictions with lax or

complicit financial institutions, or to fund criminal

enterprises. Smugglers conceal cash in aircraft,

boats, vehicles, commercial shipments, express

packages, on their person, and in their luggage.

Cash associated with illicit narcotics typically

flows out of the United States across the

southwest border into Mexico, retracing the route

that illegal drugs follow when entering the

United States. The cash may stay in Mexico,

continue on to a number of other countries, or

head back into the United States as a deposit by a

bank or casa de cambio. Illicit funds leaving the

United States also flow into Canada, which also is

a source of illegal narcotics.

Cash can be smuggled out of the

United States through the 317 official land, sea,

and air ports of entry, and any number of

unofficial routes along the Canadian and Mexican

borders. The United States shares a 3,987 mile

border with Canada and a 1,933 mile border with

Mexico. In addition to individuals carrying cash

over the border, or hiding it in vehicles, it can be

hidden in any of the thousands of shipping

containers involved in commercial trade with the

top two U.S. trading partners (Mexico and

Canada).

The extent to which cash smuggled out of the

United States is derived from criminal activity

other than the sale of illegal drugs is not known.

Other cash-intensive sources of illicit income

include alien smuggling, bribery, contraband

smuggling, extortion, fraud, illegal gambling,

kidnapping, prostitution, and tax evasion.

VII. Shell companies and trusts

The United Nations noted, in a 1998 report,

that "the principal forms of abuse of secrecy have

shifted from individual bank accounts to corporate

bank accounts and then to trust and other

corporate forms…." OFFICE FOR DRUG CONTROL

AND CRIME PREVENTION, UNITED NATIONS,

FINANCIAL HAVENS BANKING SECRECY AND

MONEY LAUNDERING 57 (1998). Legal entities,

such as shell companies and trusts, can use bearer

shares and nominee shareholders and directors to

hide ownership and mask financial transactions.

Legal jurisdictions, whether states within the

United States or entities elsewhere, that offer strict

secrecy laws, lax regulatory and supervisory

regimes, and corporate registries that safeguard

anonymity, are obvious targets for money

launderers. A handful of U.S. states offer

18 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

company registrations with secrecy

features—such as minimal information

requirements and limited oversight—that rival

those offered by offshore financial centers.

Delaware, Nevada, and Wyoming, are often cited

as the most accommodating jurisdictions in the

United States for the organization of these legal

entities.

Intermediaries, called nominee incorporation

services, establish U.S. shell companies and bank

accounts on behalf of foreign clients. By hiring a

firm to serve as an intermediary, the true owners

of a shell company, or other legal entity, may

avoid disclosing their identities in state corporate

filings and in the documentation used to open

corporate bank accounts.

Several options are available in the formation

of legal entities that allow beneficial owners even

greater anonymity. Bearer shares are negotiable

instruments that accord ownership of a company

to the person who possesses the share certificate.

Bearer share certificates do not contain the name

of the shareholder and are not registered, with the

possible exception of their serial numbers.

Accordingly, these shares provide for a high level

of anonymity and are easily negotiable.

Nominee shareholders can be used in

privately-held companies as stand-ins to shield

beneficial ownership information. Where nominee

shareholders are allowed, the usefulness of the

shareholder register is undermined because the

shareholder of record may not be the ultimate

beneficial owner. Similarly, nominee directors

and companies serving as directors of a legal

entity may conceal who really controls the

company.

Trusts separate legal ownership from

beneficial ownership and are useful when assets

are given to minors or individuals who are

incapacitated. The trust creator transfers legal

ownership of the assets to a trustee, which can be

an individual or a corporation. The trustee

manages the assets on behalf of the beneficiary,

based on the terms of the trust deed. Although

trusts have many legitimate applications, they can

also be misused. Trusts enjoy a greater degree of

privacy and autonomy than other corporate

vehicles, as virtually all jurisdictions recognizing

trusts do not require registration or central

registries and there are few authorities charged

with overseeing trusts. In most jurisdictions, no

disclosure of the identity of the beneficiary or the

creator of the trust is made to authorities.

VIII. Trade-based money laundering

Money launderers use fraudulent foreign trade

transactions as a way to provide cover for, and

legitimize, funds transfers using illicit proceeds.

Trade-based money laundering encompasses a

variety of schemes that involve over- and under-

invoicing, double invoicing, and misclassification

of the goods shipped.

The most common method of trade-based

money laundering in the Western Hemisphere is

the Black Market Peso Exchange (BMPE), which

is responsible for moving an estimated $5 billion

worth of drug proceeds per year from the

United States to Colombia. The scheme allows

drug traffickers to exchange their illicit dollars in

the United States for clean pesos in Colombia,

without physically moving funds from one

country to the other. See David Marshall Nissman,

The Columbia Black Market Peso Exchange,

UNITED STATES ATTORNEYS' BULLETIN, June

1999, at 31.

Money brokers act as intermediaries between

the drug traffickers in the United States who hold

dollars, but want pesos, and Colombian

businessmen who hold pesos, but want dollars to

purchase goods for import. The money brokers

buy the illicit dollars in the United States and

enlist smurfs to buy money orders or deposit the

cash in U.S. bank accounts. The money is then

used to purchase U.S. products which are

exported to Colombia and elsewhere. The

Colombian importers complete the money

laundering cycle by paying the money broker for

the U.S. merchandise with pesos, which are

transferred to the drug dealers.

Access to U.S. dollars is regulated by the

Colombian government. Before pesos can be

exchanged for dollars, the importer has to

demonstrate that government import permits have

been obtained, thereby insuring that the applicable

Colombian duties and taxes will be collected.

Colombian businesses bypass the government

levies by dealing with BMPE brokers. See Figure

1, page 20.

A similar scheme to evade Colombian taxes

involves reintegro, which means "reintegrate

papers." When goods are exported from

Colombia, the shipper must obtain official

documents that clear the goods for export and

allow payment to be received into the shipper's

bank account. After the initial use of the export

documents, these papers are often sold for others

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 19

to use, creating an opportunity to repatriate drug

proceeds disguised as payments for exports.

In addition to the import and export of

conventional goods, precious gems and metals can

be used as an alternative to cash to transfer value

across borders. Like gold and other precious

metals, diamonds are attractive to money

launderers because they are easily concealed and

transported, and because they are mined in remote

areas of the world and are virtually untraceable to

their original source. Even when diamonds are

transported openly, it is relatively easy to mislabel

their value for money laundering purposes.

IX. Life insurance and investments

Life, health, and accident insurance, generate

more than half a trillion dollars in premiums and

contract revenue annually for U.S. insurers. Much

of this revenue stream actually comes from the

sale of annuities, contracts that guarantee a fixed

or variable payment over a given period of time.

While whole and term life insurance policies

remain an important part of the business,

insurance agents and brokers are now often

investment advisers selling a variety of financial

products. The expansion from insurance policies

to investment products has substantially increased

the money laundering threat posed by the

insurance industry.

Life insurance policies that can be cashed in

are an inviting money laundering vehicle because

criminals are able to put "dirty" money in and take

"clean" money out in the form of an insurance

company check. An alternative money laundering

vehicle is to purchase life insurance with illegal

proceeds and then borrow against the policy.

Similarly, annuity contracts allow a money

launderer to exchange illicit funds for an

immediate or deferred "clean" income stream.

These vulnerabilities generally do not exist in

products offered by property and casualty

insurers, or by title or health insurers.

Money launderers exploit the fact that

insurance products are often sold by independent

brokers and agents who do not work directly for

the insurance companies. These intermediaries

may have little know-how or incentive to screen

clients or question payment methods. In some

cases, agents take advantage of their intermediary

status to collude with criminals against insurers to

perpetrate fraud or facilitate money laundering.

X. Conclusion

The United States has a robust and aggressive

AML program. As it becomes more difficult to

move illicit funds using a particular money

laundering method, there is a clear migration to

other channels. The Financial Action Task Force

recognized the effectiveness of the United States.

AML enforcement regime in its Report on the

Third Mutual Evaluation of the United States,

adopted in June 2006, available at

http://www.fatf-gafi.org/dataoecd/44/12/3710170

6.pdf. The Report's summary states: "The U.S.

Authorities are committed to identifying,

disrupting, and dismantling money laundering and

terrorist financing networks. They seek to combat

money laundering and terrorist financing on all

fronts, including by aggressively pursuing

financial investigations. These efforts have

produced impressive results in terms of

prosecutions, convictions, seizures, asset freezing,

confiscation and regulatory enforcement

actions."

ABOUT THE AUTHOR

Emery Kobor advises Treasury policymakers

on a range of issues, but focuses primarily on

identifying emerging money laundering and

terrorist financing threats associated with global

payment and communications networks. Emery

chaired the intergovernmental working group that

produced the 2007 National Money Laundering

Strategy and was the principal author of the first

U.S. Money Laundering Threat Assessment,

published in 2005. He served as co-chair of the

international Financial Action Task Force

working group that produced the Report on New

Payment Methods, published in October 2006.

Prior to joining the Department of the Treasury in

2004, Emery worked as a consultant, advising

corporate treasurers on payment and risk

management strategies and was a senior research

analyst for the Federal Reserve Bank of Chicago's

Payments Studies Group.a

20 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

Figure 1

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 21

The Money Laundering Statutes (18

U.S.C. §§ 1956 and 1957)

Stefan D. Cassella

Deputy Chief for Legal Policy

Asset Forfeiture and Money Laundering

Section

Criminal Division

I. Introduction

The principal money laundering statutes are

18 U.S.C. §§ 1956 and 1957. Section 1956

consists of three provisions dealing with domestic

money laundering, international money

laundering, and undercover "sting" cases,

respectively. See 18 U.S.C. § 1956(a)(1), (a)(2),

and (a)(3). Section 1957 makes it an offense

simply to conduct any monetary transaction in

criminal proceeds involving more than $10,000.

This article will focus first on the elements of the

domestic money laundering statute, § 1956(a)(1),

and then will point out the similarities and

differences between this statute and the other

three.

II. Section 1956(a)(1)

A domestic money laundering offense under

Section 1956(a)(1) is committed if the defendant:

• Knowing that certain property represents the

proceeds of some form of unlawful activity;

and

• Intending to

a. promote the carrying on of the specified

unlawful activity, or

b. engage in conduct that violates 26

U.S.C. §§7201 or 7206, or

c. conceal or disguise the nature, location,

source, ownership, or control of the

proceeds of the specified unlawful

activity, or

d. avoid a transaction reporting

requirement;

• Uses the property, which is in fact the

proceeds of a specified unlawful activity

(SUA);

• To conduct or attempt to conduct a financial

transaction affecting interstate commerce.

The actus reus of the crime is the financial

transaction. The remaining elements are mental

states (knowledge and intent) or factual predicates

(the property must be SUA proceeds; the

transaction must affect interstate commerce) that

must be present at the time of the financial

transaction. Thus, in any money laundering case,

it is best for the prosecutor to focus first on which

financial transaction will serve as the basis for the

money laundering. See Figure 1, page 32.

A. Financial transaction

The terms "transaction" and "financial

transaction" are defined in § 1956(c)(3) and (4). In

short, virtually anything that can be done with

money is a financial transaction—whether it

involves a financial institution, another kind of

business, or even private individuals. Thus, the

simple transfer of cash from one person to another

may constitute a money laundering offense. See

United States v. Otis, 127 F.3d 829 (9th Cir. 1997)

(drug dealer's delivery of cash to a money

launderer is a financial transaction). Other

examples abound in the case law. See

United States v. Herron, 97 F.3d 234, 237 (8th

Cir. 1996) (wire transfer through Western Union

is a financial transaction); United States v.

Rounsavall, 115 F.3d 561 (8th Cir. 1997) (writing

check to purchase cashier's checks is financial

transaction); United States v. Brown, 31 F.3d 484,

489 n.4 (7th Cir. 1994) (processing credit card

charges involves "payment, transfer, or delivery

by, through, or to a financial institution").

Note that the transaction does not need to

involve money or other monetary instruments.

Simply transferring title to certain kinds of

property, such as land or vehicles, falls within the

statutory definition of a financial transaction. See

United States v. Hall, 434 F.3d 42, 52 (1st Cir.

2006) (recording a mortgage is a financial

transaction); United States v. Carrell, 252 F.3d

1193, 1207 n.14 (11th Cir. 2001) (transfer of title

to real property is a financial transaction under

section 1956(c)(4)); United States v. Westbrook,

119 F.3d 1176 (5th Cir. 1997) (purchase of a

vehicle is a financial transaction because it

22 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

involves transfer of title); 18 U.S.C.

§ 1956(c)(4)(A)(iii).

The only serious limitation, in the case law, is

that the simple transportation of cash from point A

to point B by a single individual may not be a

financial transaction. There has to be a transfer or

disposition of the cash between two people. See

United States v. Puig-Infante, 19 F.3d 929 (5th

Cir. 1994) (transporting drug proceeds from

Florida to Texas was not a "transaction," absent

evidence of disposition once cash arrived at a

destination). But see United States v. Elso, 422

F.3d 1305, 1310 n.7 (11th Cir. 2005) (defendant

who retrieves third party's money from third

party's house, puts it in his car, and drives away,

conducts a "transaction").

This limitation aside, finding a financial

transaction that will satisfy the statutory definition

is generally not difficult for the prosecutor.

Indeed, the typical crime, conducted for profit,

will involve a whole series of financial

transactions. The issue for the prosecutor,

therefore, is choosing which financial transaction

to use as the basis for the criminal charge.

This choice is critical for many reasons. First,

most courts hold that each financial transaction is

a separate offense. Because the unit of prosecution

is the financial transaction, and because charging

multiple transactions as a continuing course of

conduct in a single count is duplicitous, the

prosecutor is forced to choose one financial

transaction for each count in the indictment. See

United States v. Prescott, 42 F.3d 1165, 1166 (8th

Cir. 1994) (charging multiple financial

transactions as a continuing course of conduct in a

single count is duplicitous); United States v.

Huber, 2002 WL 257851, *1 (D.N.D. Jan. 3,

2002) (Congress intended each financial

transaction to constitute a separate offense,

"[t]hus, there is no doubt that the Government

must charge a specific financial transaction for

each substantive money laundering count," citing

legislative history). But see United States v.

Moloney, 287 F.3d 236, 241 (2d Cir. 2002) ("a

single money laundering count can encompass

multiple acts provided that each act is part of a

unified scheme"); United States v. Gordon, 990 F.

Supp. 171 (E.D.N.Y. 1998) (single money

laundering count charging multiple financial

transactions not duplicitous where all transactions

were part of single continuous scheme).

Moreover, the choice of the financial

transaction fixes the time at which the other

elements apply. That is, the defendant must have

the requisite knowledge and intent, and the

property must represent SUA proceeds, at the time

the financial transaction takes place. See

United States v. Hughes, 230 F.3d 815, 820-21

(5th Cir. 2000) (defendant must know money was

criminal proceeds at the time he conducts the

money laundering transaction); United States v.

Puig-Infante, 19 F.3d 929, 938-39 (5th Cir. 1994)

(drug deal is not a money laundering offense

because money exchanged for drugs is not

proceeds at the time the financial transaction takes

place).

The financial transaction also determines

venue, see United States v. Cabrales, 524 U.S. 1

(1998) (venue for money laundering lies where

the financial transaction occurred), and it

determines the timing of the money laundering

offense for statute of limitations purposes. See

United States v. Blackwell, 954 F. Supp. 944, 956

(D.N.J. 1997) (statute of limitations begins to run

when the financial transaction is initiated),

following United States v. Li, 55 F.3d 325, 330

(7th Cir. 1995). Finally, the choice of the financial

transaction determines what property is going to

be subject to forfeiture. See 18 U.S.C. §§ 981 and

982 (only property "involved in" the financial

transaction is subject to forfeiture).

B. Interstate commerce

After some debate, the courts have concluded

that the effect on interstate commerce is an

element of the offense that the government must

allege in the indictment and prove beyond a

reasonable doubt. See United States v. Evans, 272

F.3d 1069, 1081 (8th Cir. 2001) ("[a]n effect on

interstate commerce is an essential element of

money laundering."); United States v. Ladum, 141

F.3d 1328 (9th Cir. 1998) (interstate commerce is

both jurisdictional and an essential element of the

offense); United States v. Allen, 129 F.3d 1159

(10th Cir. 1997) (in a section 1957 case, the

interstate commerce requirement is both

jurisdictional and an essential element of the

offense and must be decided by a jury).

Showing a small impact is, however,

sufficient. Very frequently, the government will

simply show that the transaction involved an

Federal Deposit Insurance Corporation (FDIC)-

insured bank or was commercial in nature. See

United States v. Peay, 972 F.2d 71 (4th Cir. 1992)

(transaction involving funds on deposit at a

financial institution insured by FDIC affects

interstate commerce); United States v. Kunzman,

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 23

54 F.3d 1522 (10th Cir. 1995) (same);

United States v. Trammell, 133 F.3d 1343 (10th

Cir. 1998) (depositing checks drawn on FDIC-

insured bank and wiring money from bank in one

state to bank in another affects interstate

commerce); United States v. Jackson, 935 F.2d

832 (7th Cir. 1991) (transaction involving check

drawn on a bank implicates interstate commerce);

United States v. Ripinsky, 109 F.3d 1436, opinion

amended on denial of reh'g, 129 F.3d 518 (9th

Cir. 1997) (if the transaction is commercial in

nature, government need only prove that it had a

minimal effect on interstate commerce that,

through repetition by others, could have a

substantial effect).

C. Knowledge

The government must show that, at the time

the financial transaction occurred, the money

launderer knew that the property in the financial

transaction was dirty money. Specifically, he must

know that the property represented the proceeds

of "some form" of unlawful activity, but he does

not need to know precisely what the unlawful

activity was. See 18 U.S.C. § 1956(c)(1). In other

words, it is not a defense for the defendant to say,

"I did not know it was drug money, I thought it

was the proceeds of insurance fraud." See

United States v. Turner, 400 F.3d 491, 496 (7th

Cir. 2005) (defendant need not know actual source

of the money, but only that it came from some

"illegal activity"); United States v. Rivera-

Rodriguez, 318 F.3d 268, 271 (1st Cir. 2003)

("defendant is not required to know what type of

felony spawned the proceeds but only that some

felony did so."); United States v. Reiss, 186 F.3d

149, 154 (2d Cir. 1999) (defendant need only

know money is criminally derived; he does not

need to know it is drug proceeds); United States v.

Marzano, 160 F.3d 399, 400 (7th Cir. 1998) (if

defendant thought he was laundering drug money,

the fact that he actually laundered embezzlement

proceeds would not be a defense).

The question most prosecutors face is how to

prove a defendant knew the money he was

laundering for someone else was illegally

derived? As with other issues involving a mental

state, the proof is usually circumstantial and the

case law provides many examples.

For instance, in United States v. Golb, 69 F.3d

1417 (9th Cir. 1995), the court held that the jury

could infer that the defendant, who brokered an

airplane sale, (1) knew that the purchase money

was illegally derived because the money came as

multiple, anonymous wire transfers and bundles

of checks, (2) made statements about the

purchaser's involvement in drug trafficking, and

(3) made threats of violence, showing he knew he

was not representing a legitimate business person.

See United States v. Otis, 127 F.3d 829, 835 (9th

Cir. 1997) (defendant's "pager contacts,

associations, and criminal history" sufficient to

show that defendant knew the $60,000 he turned

over to third-party in parking lot was criminal

proceeds); United States v. Hurley, 63 F.3d 1 (1st

Cir. 1995) (even underlings who never dealt with

drug dealers knew that money they were

laundering was drug proceeds because no other

cash-generating business would require the

laundering of such huge quantities of cash);

United States v. Campbell, 977 F.2d 854 (4th Cir.

1992) (real estate agent willfully blind to client's

use of drug proceeds to purchase house).

Similarly, in United States v. Bornfield, 145

F.3d 1123 (10th Cir. 1998), the Tenth Circuit held

that an accountant had actual knowledge that his

client's cash came from drug dealing because the

accountant (1) prepared the drug dealer's tax

returns, (2) knew he sold drugs, and (3) knew he

had insufficient legitimate income.

D. Proceeds

The third element of money laundering under

Section 1956(a)(1) is that the property in the

financial transaction was, in fact, the proceeds of

an offense constituting "specified unlawful

activity." The offenses listed in § 1956(c)(7), and

all of the RICO predicates listed in 18 U.S.C.

§ 1961(1), qualify as SUAs. In addition, certain

violations of foreign law, including offenses

against a foreign country involving drug

trafficking, kidnapping, robbery, extortion, bank

fraud, murder, and destruction of property by

means of explosives or fire, are SUAs. See

§ 1956(c)(7)(B).

Proving the property is SUA proceeds is easy,

if the prosecutor can trace the money to a

particular offense. It is not, however, necessary to

do this. The courts unanimously hold that

showing the SUA generated the money or other

property, without identifying the date and place of

the offense, is sufficient. For example, in

United States v. Golb, 69 F.3d 1417 (9th Cir.

1995), evidence that the money came from an

account used by professional money launderers to

launder drug proceeds was sufficient to establish

the "proceeds" element. Similarly, in

United States v. Blackman, 904 F.2d 1250, 1257

24 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

(8th Cir. 1990), the government proved that the

property in the financial transaction was drug

proceeds by showing that the defendant was

engaged in the drug business and was using wire

services to move a lot of cash. The government

also called an expert witness to testify that these

transactions were typical of what drug dealers do

with drug money. See also United States v.

Hardwell, 80 F.3d 1471 (10th Cir. 1996)

(evidence that the defendant was engaged in drug

trafficking and had insufficient legitimate income

to produce the money used in the financial

transaction was sufficient); United States v.

Herron, 97 F.3d 234, 237 (8th Cir. 1996) (same);

United States v. Eastman, 149 F.3d 802 (8th Cir.

1998) (following Blackman; no need to trace

proceeds to particular drug sale; government may

rely on defendant's involvement in drug trade and

lack of legitimate income to prove wired money

was drug proceeds).

As these cases illustrate, prosecutors

commonly prove that the property is SUA

proceeds with circumstantial evidence. See

United States v. Gotti, 459 F.3d 296, 337 (2d Cir.

2006) (multitude of illegal activities of organized

crime family provided sufficient circumstantial

evidence that the money they laundered was SUA

proceeds); United States v. Pizano, 421 F.3d 707,

723 (8th Cir. 2005) (defendant's lack of legitimate

income, cash deposits into her account, and

conduct of transactions on behalf of brother who

is a drug dealer, sufficient to establish that funds

defendant used to purchase real property were

brother's drug proceeds); United States v. Misher,

99 F.3d 664 (5th Cir. 1996) (when defendant, who

is connected to drug trafficking, pays for a car

with suitcase full of cash, there is sufficient

evidence that the money is SUA proceeds).

Note that only part of the money involved in

the financial transaction needs to be SUA

proceeds; proving "that the funds in question

came from an account in which tainted proceeds

were commingled with other funds is sufficient."

United States v. Garcia, 37 F.3d 1359, 1365 (9th

Cir. 1994). See United States v. Huber, 404 F.3d

1047, 1058 (8th Cir. 2005) (the presence of

legitimate funds does not make a money

laundering transaction lawful; it is only necessary

to show that the transaction involves criminal

proceeds); United States v. Bieganowski, 313 F.3d

264, 279-80 (5th Cir. 2002) (even if some of

health care provider's income was legitimate,

transfer of commingled funds would satisfy the

proceeds element of § 1956(a)(1)); United States

v. Rodriguez, 278 F.3d 486, 491 (5th Cir. 2002)

(jury was free to convict alien smuggler of money

laundering despite evidence that he used

commingled funds to conduct his financial

transactions).

E. Merger issue

The most troublesome issue involving the

proceeds element is the requirement that the

property be SUA proceeds at the time the

financial transaction takes place. If the financial

transaction constituting the underlying crime and

the money laundering offense take place

simultaneously, the two offenses are said to

"merge." In this instance, the money laundering

prosecution fails because no separate money

laundering offense occurred.

For example, if a drug sale takes place on a

street corner, there is clearly a financial

transaction, but the transaction does not involve

SUA proceeds at the time it takes place because

the seller does not receive proceeds until the sale

is complete. For there to be a money laundering

offense, a subsequent, "downstream" transaction,

such as the deposit of the sale proceeds into a

bank account, must occur. See United States v.

Butler, 211 F.3d 826, 830 (4th Cir. 2000) ("the

laundering of funds cannot occur in the same

transaction through which those funds first

become tainted by crime"); United States v.

Richard, 234 F.3d 763, 769 (1st Cir. 2000) (same;

quoting Butler); United States v. Mankarious, 151

F.3d 694, 706 (7th Cir. 1998) (the acts that

produce the proceeds being laundered must be

distinct from the conduct that constitutes money

laundering); United States v. Carucci, 364 F.3d

339, 345-46 (1st Cir. 2004) (conviction reversed

because evidence did not establish that the SUA

offense occurred before the money laundering

transaction); United States v. Howard, 271 F.

Supp. 2d 79, 84-90 (D.D.C. 2002) (the money

laundering statutes criminalize transactions in

proceeds, not the transactions that create the

proceeds; extended discussion of merger cases).

The merger of the money laundering

transaction and the underlying SUA is a big

problem in fraud cases where it is often unclear

whether the transaction is simply part of the fraud,

or is a downstream transaction constituting a

separate money laundering offense. As a general

principle, prosecutors should only charge money

laundering where the fraud scheme has matured to

the point where it has yielded proceeds that fall,

directly or indirectly, within the defendant's

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 25

control, and the defendant then conducts a

separate downstream transaction. See

United States v. Johnson, 971 F.2d 562 (10th Cir.

1992) (where a defendant fraudulently induces a

victim to wire transfer funds directly to the

defendant's account, such transfer does not

constitute money laundering, because funds were

not "criminally derived" at the time the transfer

took place; if, however, the transaction involved

two steps—with defendant first obtaining money

from victim and then making deposit—the second

step would be a § 1957 violation); United States v.

Savage, 67 F.3d 1435 (9th Cir. 1995) (wire

transfer out of bank account constitutes § 1957

violation where defendant had control over the

account at the time the transfer was made, even

though it was not in his name; distinguishing

Johnson where defendant did not have control

over victim's money until the transfer was

complete); United States v. Estacio, 64 F.3d 477

(9th Cir. 1995) (no violation of merger rule where

proceeds of earlier phase of check kiting scheme

were used to continue the scheme). But see

United States v. Christo, 129 F.3d 578 (11th Cir.

1997) (distinguishing Estacio; if transaction is the

first and only step in a check kiting scheme, it

does not involve SUA proceeds because no bank

has yet lost any money).

It is not necessary that the fraud scheme be

complete. The money laundering offense may

constitute one step in the scheme, but the scheme

must have reached a point where it has yielded

proceeds before the defendant can be guilty of

committing a money laundering offense. See

United States v. Thomas, 451 F.3d 543, 548-49

(8th Cir. 2006) (checks that defendant obtained

from victims were "proceeds obtained from

ongoing fraudulent activities" when he cashed

them or deposited them into a bank account; it is

not necessary for the underlying fraud to be

complete; distinguishing Johnson and following

Mankarious); United States v. Richard, 234 F.3d

763, 770 (1st Cir. 2000) (checks that defendant

received from investors and intended to conceal

from bankruptcy court were proceeds of

completed phase of bankruptcy scheme, and

subsequent transactions were money laundering

offenses even though the bankruptcy fraud was

not yet complete; following Mankarious);

United States v. Castellini, 392 F.3d 35, 49 (1st

Cir. 2004) (SUA need not be complete for it to

yield proceeds; money becomes proceeds of § 152

bankruptcy fraud as soon as debtor gives it to

third party to hide for him, even though no

bankruptcy petition has yet been filed; what third

party does with the money is a money laundering

offense).

F. Inconsistent verdicts; acquittal on the

SUA

There have been a number of cases where the

defendant was acquitted on the underlying SUA

offense but convicted of money laundering. Of

course, nothing is wrong with this if the defendant

is convicted of laundering the proceeds of an

offense committed by someone else. Nevertheless,

if the government charges the defendant with

laundering the proceeds of his own illegal

conduct, whether such inconsistent verdicts will

be upheld depends on how the indictment is

drafted.

If the indictment charges the defendant with

laundering the proceeds of a particular crime but

does not refer to specific counts in the indictment,

the defendant may be convicted of money

laundering, even though he is acquitted on the

counts charging the underlying crime. In this

instance, the jury could have found that the

property being laundered was the proceeds of

crimes other than those alleged in the indictment,

or that the crimes alleged in the indictment were

committed by someone other than the defendant.

See United States v. Magluta, 418 F.3d 1166,

1174 (11th Cir. 2005) (defendant's acquittal in

separate drug prosecution does not estop

government from using same drug offenses to

prove the proceeds element of money laundering;

jurors may have acquitted defendant because they

believed someone else committed the drug

offenses); United States v. Whatley, 133 F.3d 601

(8th Cir. 1998) (money laundering conviction

affirmed notwithstanding jury's acquittal on

underlying fraud SUA, as long as there was

sufficient evidence to support finding that

laundered funds were SUA proceeds).

Where, however, the money laundering count

alleges that the defendant laundered the proceeds

of specific counts in the indictment, and the

conviction on those counts is reversed, the money

laundering conviction must be vacated as well.

United States v. Adkinson, 135 F.3d 1363 (11th

Cir. 1998). Therefore, prosecutors should be

careful to draft money laundering counts charging

the defendant with laundering the proceeds of an

offense or scheme generally, e.g., the property

was the proceeds of SUA, to wit: a scheme to

defraud in violation of 18 U.S.C. § 1343—and not

the proceeds of specific counts.

26 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

G. Specific intent

At the time of the financial transaction, the

defendant must act with one of four specific

intents. These are alternative mental intents that

the government may allege in the conjunctive in

the indictment and in the disjunctive in the jury

instructions. See United States v. Navarro, 145

F.3d 580 (3d Cir. 1998) (alternative intents should

be charged in the conjunctive and the jury

instructed in the disjunctive; no unanimity

instruction required); United States v. Holmes, 44

F.3d 1150 (2d Cir. 1995) (it is multiplicitous to

charge defendant in multiple counts with

violations of different subsections of § 1956(a)(1)

based on same financial transaction).

Intent to promote. The defendant violates the

money laundering statute if he conducts a

financial transaction with the intent to promote

any SUA. See 18 U.S.C. § 1956(a)(1)(A)(i). This

is called "promotion money laundering."

Commonly, prosecutors prove promotion

money laundering by showing that the defendant

reinvested the proceeds of his offense to keep the

scheme going. The case law is filled with

examples of this so-called "plowing back" of the

proceeds. See United States v. Lawrence, 405 F.3d

888, 901 (10th Cir. 2005) (using proceeds of

Medicare fraud scheme to pay doctor whose

participation was essential to the scheme and keep

"the doors of the clinic open" promoted the

scheme and was not use of ordinary business

expenses); United States v. Grasso, 381 F.3d 160,

168-69 (3d Cir. 2004) (reinvesting proceeds of

fraudulent scheme to cover advertising, printing,

and mailing expenses, was promotion money

laundering), cert. granted and judgment vac'd,

544 U.S. 945 (2005) (remanded for consideration

in light of Booker decision); United States v.

Marbella, 73 F.3d 1508 (9th Cir. 1996) (using

fraud proceeds to pay commissions to persons

who brought in more victims promoted SUA).

Courts have also found the "promotion"

element satisfied where the defendant used SUA

proceeds to lull new victims into his scheme or to

avoid detection. See United States v. Ismoila, 100

F.3d 380 (5th Cir. 1996) (defendant promoted

scheme to defraud credit card issuers by

depositing credit card receipts into business bank

account because it gave appearance that defendant

was operating a legitimate business that accepted

credit card payments for merchandise);

United States v. Hand, 76 F.3d 393 (10th Cir.

1995) (unpublished) (using proceeds to create

"aura of legitimacy" for benefit of victims

promotes fraud scheme); United States v. Savage,

67 F.3d 1435 (9th Cir. 1995) (transferring money

to Europe lent "aura of legitimacy" to defendant's

fraudulent claim that he was investing victim's

money in European investment business). Of

course, it is also an offense to use the proceeds of

one crime to commit an entirely separate crime.

Intent to evade income taxes. The second intent

alternative is to prove that the defendant

laundered the SUA proceeds with the intent to

evade income taxes. See 18 U.S.C.

§ 1956(a)(1)(A)(ii); United States v. Suba, 132

F.3d 662 (11th Cir. 1998) (defendant's failure to

report three checks on his income tax return is

evidence that he laundered them with intent to

evade taxes). In these cases, Tax Division

authorization is required for any prosecution

under § 1956(a)(1)(A)(ii) where the purpose of

the financial transaction was to evade paying

taxes.

Intent to conceal or disguise. The most commonly

alleged money laundering offense is the one that

involves a financial transaction conducted with

the intent to conceal or disguise the nature, source,

location, ownership, or control, of the SUA

proceeds. See 18 U.S.C. § 1956(a)(1)(B)(i). This

is called "concealment money laundering."

Almost always, the prosecutor will have to prove

intent to conceal or disguise by circumstantial

evidence.

One way this is done is to show that the

defendant engaged in unusual or convoluted

transactions that would make no sense unless his

purpose was to conceal or disguise. For example,

in United States v. Tencer, 107 F.3d 1120 (5th

Cir. 1997), the Fifth Circuit held that depositing

proceeds into geographically distant bank

accounts, sending the proceeds (commingled with

untainted funds) to a mail drop address, and trying

to convert all of the proceeds to cash as

investigators closed in, all indicated an intent to

conceal, although the defendant conducted the

transactions in his own name. See also

United States v. Morales-Rodriguez, 467 F.3d 1,

13 (1st Cir. 2006) (monthly secretive transfers of

funds between three separate bank accounts was

an attempt to conceal the nature, location, source,

ownership, and control, of proceeds);

United States v. Magluta, 418 F.3d 1166, 1177

(11th Cir. 2005) (moving cash from Miami to

New York to Israel, where it was deposited in an

account in a false name, was sufficient to show

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 27

that when defendant paid his lawyer with check

drawn on that account, he intended to conceal the

source of the money); United States v. Turner,

400 F.3d 491, 496-98 (7th Cir. 2005) (use of

interest-free loans, putting property in name of

third party, structuring deposits, and traveling to

out-of-town banks to conduct transactions

involving cashier's checks all show intent to

conceal or disguise).

Intent to conceal or disguise can also be

shown by evidence that the defendant conducted

the transaction in the name of a third-party or

legitimate business. See United States v. Hall, 434

F.3d 42, 53 (1st Cir. 2006) (having sister purchase

a money order in her name was evidence of intent

to conceal the source of money used to purchase a

vehicle); United States v. Cruzado-Laureano, 404

F.3d 470, 483 (1st Cir. 2005) (corrupt mayor who

deposited extortion checks payable to wife's

dental practice into her account had intent to

conceal; that he was well-known in the bank is no

defense); United States v. Shepard, 396 F.3d

1116, 1122-23 (10th Cir. 2005) (depositing fraud

proceeds in bank account of family member

shows intent to conceal); United States v. Ladum,

141 F.3d 1328 (9th Cir. 1998) (having tenants pay

rent checks to nominee conceals true ownership of

property on which rent is paid); United States v.

Suba, 132 F.3d 662 (11th Cir. 1998) (defendant

invested fraud proceeds in securities and real

estate through children's trust fund after forging

trustee's name).

Likewise, intent to conceal or disguise can be

shown by evidence that the defendant

intentionally commingled the SUA proceeds with

other funds. See United States v. Griffith, 85 F.3d

284 (7th Cir. 1996) (commingling funds from

legitimate and illegal businesses and funneling

proceeds of illegal activities through legitimate

financial channels shows intent to conceal);

United States v. Posters N Things Ltd., 969 F.2d

652, 661 (8th Cir. 1992), aff'd on other grounds,

114 S. Ct. 1747 (1994) (commingling dirty money

with revenue from legitimate business in common

account); United States v. Rutgard, 108 F.3d 1041

(9th Cir. 1997) (dicta) (commingling criminally

derived cash with innocently derived funds can

show intent to conceal or disguise identity of

tainted money).

In some cases, courts have held that simply

converting SUA proceeds into goods and services

violated the "conceal or disguise" prong of the

statute. For example, in United States v. Norman,

143 F.3d 375 (8th Cir. 1998), the Eighth Circuit

held that the purchase of a car constituted a

violation of § 1956(a)(1)(B)(i), because it

concealed what happened to the SUA proceeds. In

other words, converting the money from one form

to another, e.g., bank deposits into consumer

goods, may constitute a money laundering

offense, if the transaction is designed to conceal

or disguise the SUA proceeds. See United States

v. Martinez-Medina, 279 F.3d 105, 115-16 (1st

Cir. 2002) (purchasing consumer items through

third parties with cash from drug sales supports

inference of intent to conceal); United States v.

Heater, 63 F.3d 311 (4th Cir. 1995) (use of large

quantities of cash to buy vehicles and real

property, using third-party names and addresses,

showed intent to conceal or disguise drug

proceeds by purchasing merchandise);

United States v. Wynn, 61 F.3d 921 (D.C. Cir.

1995) (drug dealer who spent hundreds of

thousands of dollars on expensive clothes with

cooperation of merchant who recorded sales in

false names intended to conceal or disguise drug

money by converting it to goods).

In other cases, however, where the defendant

simply spent the SUA proceeds and made no

effort to conceal or disguise either his identity or

the source of the funds, the evidence was

insufficient to establish a violation of this prong

of § 1956(a)(1)(B)(i). See United States v.

Sanders, 929 F.2d 1466, 1472 (10th Cir. 1991)

(buying a car in own name or daughter's name

with drug proceeds is not violation of (a)(1)(B)(i);

§ 1956 is not a "money spending" statute);

United States v. Garcia-Emanuel, 14 F.3d 1469

(10th Cir. 1994) (simply buying horse and watch

with drug proceeds and using drug proceeds to

make mortgage payments insufficient to show

intent to conceal or disguise); United States v.

Dobbs, 63 F.3d 391 (5th Cir. 1995) (where SUA

proceeds were deposited into wife's bank account

and used for family expenses, there was

insufficient evidence of intent to conceal or

disguise); United States v. Rockelman, 49 F.3d

418, 422 (8th Cir. 1995) (defendant purchased

cabin with cash and titled it in name of business,

but made no attempt to hide his identity or the

source of the funds). The government should

prosecute transactions in which the defendant

simply spends the illegally obtained proceeds as

violations of § 1957.

Intent to avoid transaction reporting requirement.

Finally, it is an offense to conduct a financial

transaction involving SUA proceeds if the purpose

28 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

is to evade a currency transaction reporting

requirement. See 18 U.S.C. § 1956(a)(1)(B)(ii). If,

for example, a defendant evades both the

Currency Transaction Report (CTR) requirement

(involving $10,000 cash transactions at financial

institutions) and the IRS Form 8300 requirement

(involving reports that a trade or business

receiving more than $10,000 in cash must file) by

using a $9,000 cashier's check and $9,000 in cash

to buy a car, he commits a violation of

§ 1956(a)(1)(B)(ii). See United States v. Nelson,

66 F.3d 1036 (9th Cir. 1995) (car dealer's

suggestion that customer buy another car to trade-

in to avoid paying more than $10,000 cash for

new car shows intent to evade Form 8300);

United States v. Patino-Rojas, 974 F.2d 94 (8th

Cir. 1992) (buying cashiers' checks for $9,000 and

$6,000 and giving checks and cash to dealer for

$20,000 boat).

III. Section 1956(a)(2)

The elements of § 1956(a)(2)—the

international money laundering statute—are the

same as the elements of subsection (a)(1), with

two important exceptions. First, instead of a

"financial transaction," the government must show

that the defendant engaged in the transportation,

transfer, or transmission, of property into or out of

the United States. Second, § 1956(a)(2)(A) does

not contain a "proceeds" element.

A defendant violates § 1956(a)(2)(A) if he

sends money into or out of the United States to

promote an SUA offense, regardless of whether

the money, itself, is the proceeds of any unlawful

activity. For example, it is an offense under

subsection (a)(2)(A) to send money into or out of

the United States to commit bank fraud or to

violate the Arms Export/Import Act or to support

terrorism, even if the money is not traceable to

any predicate offense. See United States v.

Piervinanzi, 23 F.3d 670 (2d Cir. 1994) (because

§ 1956(a)(2)(A) contains no proceeds

requirement, there is no "merger" problem when

the defendant wires money out of the

United States to promote fraud against a bank, and

the wire transfer constitutes both the money

laundering offense and the bank fraud);

United States v. Hamilton, 931 F.2d 1046, 1052

(5th Cir. 1991) (dicta) (foreign drug cartel could

violate § 1956(a)(2)(A) by sending proceeds of

legitimate business into the United States for the

purpose of providing necessary capital to expand

cartel's United States-based drug business);

United States v. O'Connor, 158 F. Supp. 2d 697,

726 n.52 (E.D. Va. 2001) (following Piervinanzi;

no merger problem when defendant sends money

to Bahamas and brings it back to make it appear to

be new funds in furtherance of fraud scheme).

Typically, the government will establish the

knowledge, proceeds, and intent elements of the

offense in the same way that it would establish

those elements under § 1956(a)(1). The leading

case on this statute is United States v. Cuellar,

478 F.3d 282 (5th Cir. 2007) (en banc), in which a

courier crossing the border into Mexico with drug

proceeds concealed in his vehicle was convicted

of transporting the proceeds with the intent to

conceal or disguise. The court held that the

concealment element in § 1956(a)(1)(B)(i) is the

same as in § 1956(a)(2)(B)(i) (evidence that

money was being transported by a low-level

courier who intended to cross the border with

$83,000 in currency wrapped in duct tape bundles

in a hidden compartment in his vehicle was

sufficient to establish that the transportation was

designed to conceal; expert witness may testify

that the evidence was consistent with the practice

of criminals transporting illegal funds to Mexico;

it was not necessary for the government to show

that there was a further intent to conceal once the

money arrived in Mexico); United States v.

Johnson, 440 F.3d 1286, 1291 n.4 (11th Cir.

2006) (same). Accordingly, the same

circumstantial evidence of concealment will

support a conviction. See Figure 2, page 32.

IV. Section 1956(a)(3)

Section 1956(a)(3) was added to the money

laundering statute in 1988, to make it possible to

prosecute persons who engage in the laundering

of "sting money," i.e., money that is not really

criminal proceeds but is represented as such by a

law enforcement officer, or a person acting at his

or her direction. In § 1956(a)(3) cases, the law

enforcement officer's "representation" replaces the

knowledge and proceeds elements.

Most of the litigation in sting cases involves

the nature of the representation. The courts hold

that what the undercover agent says to the target

must convey enough information to make a

reasonable person aware that the property was

criminal proceeds. See United States v. Kaufmann,

985 F.2d 884, 892 (7th Cir. 1993) (the

representation is sufficient if the law enforcement

officer makes defendant "aware of circumstances

from which a reasonable person would infer that

the property was drug proceeds"); United States v.

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 29

Castaneda-Cantu, 20 F.3d 1325 (5th Cir. 1994);

United States v. Starke, 62 F.3d 1374 (11th Cir.

1995) (same); United States v. McLamb, 985 F.2d

1284, 1291 (4th Cir. 1993) (representation made

to car dealer sufficient where "any person of

ordinary intelligence would have recognized it").

In other words, the agent does not have to

come right out and say, "I'm giving you drug

money to launder for me." Instead, he can imply

that the money was derived from an illegal source

in the vernacular of the drug trade. For example,

in United States v. Leslie, 103 F.3d 1093, 1103

(2d Cir. 1997), the Second Circuit held that the

undercover agent's statement—the cash he was

giving the target was "powder-type money" that

should not be brought over the border—was

sufficient to allow the government to convict the

target of laundering the sting money. See also

United States v. Fuller, 974 F.2d 1474 (5th Cir.

1992) (recorded conversation in which agent

describes consequences from "Colombians" if

money is lost was sufficient to establish necessary

representation; deliberate ignorance may satisfy

knowledge requirement); United States v.

Wydermyer, 51 F.3d 319 (2d Cir. 1995) (statement

that funds to be laundered came from sale of arms

smuggled into the country was sufficient to

represent that property was the proceeds of a

violation of the Arms Export Control Act). See

Figure 3, page 33.

V. Section 1957

Section 1957 makes it an offense for any

person to conduct any monetary transaction

involving more than $10,000 in "criminally

derived property." Its purpose is to make it

difficult for wrongdoers to spend their ill-gotten

gains, or to place them in the banking system, by

making it a criminal offense for a third-party to do

business with them. See United States v. Rutgard,

108 F.3d 1041, 1062 (9th Cir. 1997) (Section

1957 is designed to freeze criminal proceeds out

of the banking system); United States v. Allen,

129 F.3d 1159, 1165 (10th Cir. 1997) (Congress's

primary concern in enacting § 1957 may have

been with third-parties who give criminals the

opportunity to spend ill-gotten gains.

Nevertheless, the statute reaches the conduct of

wrongdoers who conduct transactions with the

fruits of their own criminal acts.).

The government must show that more than

$10,000 in SUA proceeds was involved in the

transaction and that the defendant knew that the

property represented the proceeds of some form of

criminal activity. The government does not have

to prove that the defendant acted with any specific

intent. See United States v. Abboud, 438 F.3d 554,

594-95 (6th Cir. 2006) (unlike § 1956, § 1957

does not require proof that the transaction was

intended to conceal or disguise); United States v.

Ghilarduci, 480 F.3d 542, 551 (7th Cir. 2007)

(rejecting as frivolous defendant's argument that

§ 1957 conviction should be reversed because

there was no concealment; concealment is not an

element); United States v. Huber, 404 F.3d 1047,

1057 (8th Cir. 2005) (§ 1956 differs from § 1957

with respect to the specific intent element; "no

intent to promote or knowledge of a design to

conceal is required, but the transaction must

consist of property with a value greater than

$10,000"); United States v. Allen, 129 F.3d 1159,

1165 (10th Cir. 1997) (Section 1957 proscribes a

wider range of conduct than § 1956 and contains

no conceal or disguise element. Thus, § 1957

applies to the most open, above-board

transactions.).

Section 1957 may be used to prosecute

someone for using SUA proceeds to buy a car, to

invest in securities, or simply to make a deposit

into a bank. See United States v. Curry, 461 F.3d

452, 457-58 (4th Cir. 2006) (engaging in any

monetary transaction with more than $10,000 in

fraud proceeds violates § 1957); United States v.

Hawkey, 148 F.3d 920, 924 (8th Cir. 1998) (use of

funds misappropriated from charitable

organization to buy vehicles for personal use

constituted § 1957 violation); United States v.

Kelley, 929 F.2d 582, 585 (10th Cir. 1991)

(defendant used proceeds of fraudulently obtained

loan to buy car); United States v. Taylor, 984 F.2d

298 (9th Cir. 1993) (defendant pleads guilty to

spending proceeds of wire fraud); United States v.

Cole, 988 F.2d 681, 682 (7th Cir. 1993)

(withdrawals from account containing proceeds of

investment fraud scheme for personal expenses

exceeding $10,000); United States v. Hollis, 971

F.2d 1441, 1446-47 (10th Cir. 1992) (deposit of

checks representing proceeds of insurance fraud

scheme is a § 1957 violation); United States v.

One 1987 Mercedes Benz 300E, 820 F. Supp. 248

(E.D. Va. 1993) (purchase of car with check

drawn on account into which extortion proceeds

had previously been deposited).

Despite some difference in wording, the

knowledge element in § 1957 is the same as it is

for a § 1956 offense: the defendant must know

that the property was derived from some form of

30 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

unlawful activity. See United States v. Turman,

122 F.3d 1167 (9th Cir. 1997) (government must

prove the defendant knew property was criminally

derived, but does not have to prove the defendant

knew money laundering itself was illegal);

United States v. Sokolow, 81 F.3d 397 (3d Cir.

1996) (defendant does not need to know that the

monetary transaction constitutes a criminal

offense); United States v. Smith, 44 F.3d 1259

(4th Cir. 1995) (knowledge that the property is

criminally derived is all that is required; defendant

need not know that the transaction was part of a

larger scheme to conceal or disguise anything);

United States v. Campbell, 977 F.2d 854 (4th Cir.

1992) (real estate agent doing business with drug

dealer can be convicted under § 1957, if the agent

knows of, or is willfully blind to, customer's

source of funds); United States v. Wynn, 61 F.3d

921, 927 (D.C. Cir. 1995) (same for merchant

selling clothes to drug dealer).

In § 1957, the phrase "criminally derived

property" means the same thing as § 1956's

"proceeds of specified unlawful activity": the

property must be the proceeds of an SUA at the

time the transaction takes place. See United States

v. Savage, 67 F.3d 1435 (9th Cir. 1995). The

important limitations in § 1957 are that the

transaction must be conducted by, to, or through,

a financial institution, and it must involve more

than $10,000 in SUA proceeds.

In most cases, the financial institution

requirement is easily met because the term

"financial institution" includes not only banks and

other traditional institutions, but also any other

type of entity listed in 31 U.S.C. § 5312, or the

regulations promulgated thereunder. Thus, the

definition of "financial institution" is very broad

and includes car dealers, jewelers, attorneys

handling real estate closings, and even

individuals, if they handle currency on a regular

basis to provide services to others. See

United States v. Pizano, 421 F.3d 707, 713 (8th

Cir. 2005) (down payments on real property made

with check and wire transfer were monetary

transactions); United States v. Dazey, 403 F.3d

1147, 1163 (10th Cir. 2005) (cashing a check is a

monetary transaction); United States v. Huber,

404 F.3d 1047, 1060 n.8 (8th Cir. 2005) (using a

check is monetary transaction; transaction must be

"by, through or to a financial institution");

United States v. Tannenbaum, 934 F.2d 8 (2d Cir.

1991) (an individual can be a financial

institution).

The key issue in most § 1957 cases is the

$10,000 threshold requirement. Because each

monetary transaction is a separate offense, it is

generally not possible to aggregate separate

transactions to reach the $10,000 threshold.

Multiple purchases from the same vendor on the

same day, or installment payments on the same

item, may, however, constitute a single

transaction in some circumstances. See

United States v. George, 363 F.3d 666, 674-75

(7th Cir. 2004) (purchasing car with cash in two

installments of $6,000 and $9,000 satisfies the

$10,000 requirement). The question seems to be

one for the jury to decide. See United States v.

Caldwell, 302 F.3d 399, 406 (5th Cir. 2002)

(noting that district court set aside jury's verdict

on one § 1957 count on ground that the amount

could not be aggregated; no government appeal);

United States v. Brown, 139 F.3d 893 (4th Cir.

1998) (Table Case) (whether purchase of several

automobiles on same day from same vendor

constituted single monetary transaction exceeding

$10,000 was question for jury).

A related issue arises when the defendant

commingles the SUA proceeds in a bank account

and then makes a withdrawal that the government

wants to charge as a violation of § 1957. The

government generally takes the view that, as long

as more than $10,000 in SUA proceeds was

deposited into the account, any subsequent

withdrawal of more than $10,000 may be said to

involve the requisite amount of tainted funds. In

United States v. Rutgard, 108 F.3d 1041, 1063

(9th Cir. 1997), however, the court held that the

defendant is entitled to a presumption that the

tainted money remains in a bank account until the

last withdrawal. Thus, if the defendant puts

$50,000 in illegal proceeds into a bank account

containing $10,000 in "clean" money, and then

makes a $15,000 withdrawal, the Ninth Circuit

would likely hold that this does not satisfy the

threshold requirement for § 1957. Because of the

"last out" rule, courts in the Ninth Circuit must

presume that the $15,000 withdrawal consisted

primarily of the clean money, while the "dirty"

money remained in the bank account. The courts

are generally split on this issue. See United States

v. Davis, 226 F.3d 346, 357 (5th Cir. 2000)

("when the aggregate amount withdrawn from an

account containing commingled funds exceeds the

clean funds, [any] individual withdrawal[s] may

be said to be of tainted money, even if a particular

withdrawal was less than the amount of clean

money in the account"); United States v. Haddad,

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 31

462 F.3d 783, 792 (7th Cir. 2006) (where the

"vast majority" of funds in a commingled account

containing $18,000 is fraud proceeds, the

evidence is sufficient to prove that more than

$10,000 of a $16,000 withdrawal was fraud

proceeds; rejecting Rutgard); United States v.

Mooney, 401 F.3d 940, 946 (8th Cir. 2005)

(deposit of five checks drawn on an account

containing commingled funds was a § 1957

offense even though there was enough clean

money in the account to cover the checks; "the

government need not trace each dollar to a

criminal source to prove a violation of 18 U.S.C.

§ 1957"); United States v. Johnson, 971 F.2d 562,

570 (10th Cir. 1992) (in the context of a with-

drawal, the government is not required to prove

that no untainted funds were commingled with the

unlawful proceeds for § 1957 purposes). See

Figure 4, page 33.

VI. Comparison of Sections 1956 and

1957

Section 1956 Section 1957

Twenty year felony Ten year felony

Financial transaction

(interstate commerce)

Monetary transaction

(requires use of

financial institution)

Knows some form

of felonious conduct

Knows criminally

derived property

No $ threshold Greater than $10,000

Sting provision No sting provision

Specific intent No specific intent

No Sixth Amendment

exclusion

Excludes transaction

necessary to protect

Sixth Amendment

rights

VII. Conspiracy

Section 1956 and 1957 offenses may be

alleged as objects of a conspiracy under 18 U.S.C.

§ 371. This is useful where the government wants

to charge money laundering, along with other

offenses, in a multiobject conspiracy. Keep in

mind that the court must instruct the jury that it

must be unanimous as to which offense(s) were

the object of the conspiracy. See United States v.

Nattier, 127 F.3d 655 (8th Cir. 1997).

Most money laundering conspiracies are

charged under 18 U.S.C. § 1956(h), however.

This is the preferred method of charging for

several reasons. First, unlike § 371, there is no

overt act requirement under § 1956(h). See

Whitfield v. United States, 543 U.S. 209, 211

(2005). Second, the maximum penalty for a

§ 1956(h) conspiracy is the same as the penalty

for the offense that is the object of the conspiracy,

i.e., twenty years for a § 1956 offense, and ten

years for a § 1957 offense. See United States v.

Abrego, 141 F.3d 142 (5th Cir. 1998) (higher

penalty under § 1956(h) applies to "straddle"

conspiracies; no violation of ex post facto clause).

This contrasts with the five-year maximum

penalty for § 371 conspiracies outside of the Fifth

Circuit. Lastly, unlike § 371 prosecutions,

property involved in a § 1956(h) conspiracy is

subject to forfeiture under 18 U.S.C. § 982(a)(1).

VIII. Resources

The Asset Forfeiture and Money Laundering

Section (AFMLS) publishes an annual collection

of all relevant federal cases in a bound volume

entitled "Federal Money Laundering Cases."

Copies are available to United States Attorneys'

offices. Call the AFMLS at (202) 514-1263, to

request copies. Finally, AFMLS maintains AF

Online, a computer-based legal resource from

which we can access a collection of cases, form

indictments and jury instructions, and other

materials. Contact Beliue Gebeyehou at (202)

307-0265, for help accessing AF Online.

32 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

Figure 1

Figure 2

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 33

Figure 4

Figure 3

34 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

ABOUT THE AUTHOR

Stefan D. Cassella is the Deputy Chief for

Legal Policy in the Asset Forfeiture and Money

Laundering Section. He has been a prosecutor

since 1979. He came to the Department of Justice

in 1985 and has been involved in forfeiture and

money laundering issues since 1989. He handles

civil and criminal forfeiture cases, lectures at

training conferences on many aspects of money

laundering and forfeiture law, and is responsible

for legal advice, policy, and legislative issues for

the Department. He has published numerous law

review articles on forfeiture, a treatise entitled

Asset Forfeiture Law in the United States, and is

the editor of Quick Release, the Department's

forfeiture newsletter. From 1987-89, he served as

Senior Counsel to the U.S. Senate Judiciary

Committee.a

One-Hour Money Laundering:

Prosecuting Unlicensed Money

Transmitting Businesses Using Section

1960

Courtney J. Linn

Assistant United States Attorney

Eastern District of California

I. Introduction

Section 1960 of Title 18 makes it a crime to

conduct an unlicensed money transmitting

business. Congress enacted the statute fifteen

years ago amid concerns that money transmitting

businesses facilitated money laundering. These

concerns persist. According to the 2005 National

Money Laundering Threat Assessment and the

2007 National Drug Threat Assessment, money

transmitters continue to provide a conduit for

money launderers, particularly those linked to

narcotics trafficking. These assessments led to the

call, in the 2007 National Money Laundering

Strategy, for the law enforcement community to

continue to "work aggressively to identify and

prosecute [money transmitting businesses] that

facilitate money laundering." Available at

http://www.treas.gov/press/releases/docs/nmls.

pdf.

Given these threats, it is somewhat surprising

to learn that prior to the passage of the USA

PATRIOT Act, there was only one reported

§ 1960 case. See United States v. Velastegui, 199

F.3d 590, 593 (2d Cir. 1999). With the benefit of

hindsight, it is easy to understand why prosecutors

so seldom used § 1960. First, in its original form,

§ 1960 made it a crime to conduct a money

transmitting business in a state that imposed a

licensing requirement, and punished the lack of a

license as either a misdemeanor or a felony.

Unfortunately, during the 1990s, many states were

just beginning to impose a licensing requirement

on money transmitters and/or enacting criminal

penalties. Second, in 1994, Congress amended

§ 1960 to add a second prong. This added prong

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 35

made it a crime to conduct a money transmitting

business that failed to register with the Financial

Crimes Enforcement Network (FinCEN), a bureau

of the Department of Treasury. However, the

provision required the drafting of implementing

regulations. Third, prior to amendments to the

statute in the USA PATRIOT Act, questions

existed about the statute's mens rea element,

particularly under the state licensing prong. If, as

one district court held, the state licensing prong

required proof that the person conducting the

business knew of the state licensing requirement,

and knew the state punished the operation of the

unlicensed business as a crime, it would prove

difficult indeed to obtain a § 1960 conviction.

By late 2001, all three of these issues had

been resolved. A large number of states enacted

licensing requirements enforced by felony or

misdemeanor punishments in the years between

1992 and 2001, and regulations that gave effect to

the 1994 federal registration requirement became

operative in 1999. See 31 C.F.R. 103.41 (effective

August 20, 1999). In the USA PATRIOT Act,

Congress clarified the statute's mens rea

requirement.

Following these legislative and regulatory

changes, we have seen a sharp increase in the

number of § 1960 prosecutions and convictions.

In Fiscal Year (FY) 2001 (which ended just prior

to the passage of the USA PATRIOT Act),

prosecutors filed § 1960 charges against ten

defendants. In FY 2006, in contrast, prosecutors

filed § 1960 charges against 107 defendants.

Reported judicial decisions mirror this trend.

Since 2001, there have been approximately thirty-

five reported judicial decisions.

In short, § 1960 is only now emerging as an

effective tool to address the money laundering

threats posed by money transmitting businesses.

The statute's increased use makes this a good time

to examine it.

II. Legislative history

There is remarkably little legislative history

supporting the enactment of § 1960. The

Annunzio-Wylie Money Laundering Act, Pub. L.

No. 102-550, 106 Stat. 4044 (1992) (of which

§ 1960 was part) was a last-minute conference

addition to the Housing and Community

Development Act of 1992, Pub. L. No. 102-550,

106 Stat. 3672 (1992). Nonetheless, a more

complete explanation of the purpose of the statute

appears in the report of the Senate Banking

Committee in the prior session of Congress. See S.

REP. NO. 101-460 (1990). Though legislative

history issued in connection with an unenacted

version of a statute is not a secure indicator of

congressional intent (Ratzlaf v. United States, 510

U.S. 135, 148 n.18 (1994)), it nonetheless sheds

some light on the statute's intended scope and

meaning.

First, the legislative history indicates that

Congress modeled the statute after the illegal

gambling business statute, 18 U.S.C. § 1955. S.

REP. NO. 101-460, at 14 (1990). Prior to § 1960's

enactment, the Supreme Court had definitively

interpreted § 1955. See Sanabria v. United States,

437 U.S. 54 (1978). Thus, the construction that

the Supreme Court placed on § 1955 should guide

courts when construing the nearly identical

language in § 1960. See United States v. Wells,

519 U.S. 482, 495 (1997) (if the Supreme Court

has already provided a definitive interpretation of

the language in one statute, and Congress then

uses nearly identical language in another statute, a

court should give the language in the latter statute

an identical interpretation, unless there is a clear

indication in the text or legislative history that it

should not do so).

Second, Congress seems to have intended

§ 1960 to reach only a comparatively small

segment of the nonbank financial services

industry. In congressional hearings in the session

preceding the enactment of § 1960, Congress

heard testimony about the threats posed by

different kinds of nonbank financial services

activity, including money transmitting, currency

exchanging, and check cashing. But its attention

was particularly drawn to money transmitters. See,

e.g., S. REP. NO. 101-460, at 14 (1990).

As banks became more sophisticated in

reporting currency transactions, drug dealers

became more creative and began to rely

increasingly on unlicensed and illegal money

transmitters, on check cashers, and on money

order vendors, all users and sources of high

amounts of cash * * * It is primarily the

unlicensed money transmitter that provides

the best means of laundering money and is

most often used to structure illegal

transactions) (emphasis added).

See also United States v. Velastegui, 199 F.3d 590

(2d Cir. 1999). As discussed below, this

legislative history, coupled with the somewhat

narrow definition of "money transmitting" in

§ 1960(b)(2), may indicate that check cashers and

36 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

currency exchangers fall outside of § 1960's

ambit.

Finally, the legislative history reveals that

when Congress amended § 1960 in the USA

PATRIOT Act, it understood the statute to reach

not just storefront money transmitters, but also

informal value transfer systems through which

criminals transmit money, such as hawalas and the

cash courier operations of drug traffickers. See

H.R. REP. NO. 107-250, at 54 (2001) ("Thus, a

person who agrees to transmit or to transport drug

proceeds for a drug dealer, or funds from any

source for a terrorist, knowing such funds are to

be used to commit a terrorist act, would be

engaged in the operation of an unlicensed money

transmitting business.") Here, we need to be

cautious about giving too much weight to the

legislative history because these statements

occurred years after § 1960's passage. Oscar

Mayer & Co. v. Evans, 441 U.S. 750, 758 (1979).

That said, the statements provide some support for

the conclusion that § 1960's definition of "money

transmitting" is flexible and expansive enough to

encompass at least some nonbank financial

services activity, such as web-based value transfer

schemes.

III. Elements of the statute

Section 1960 makes it illegal to knowingly

conduct, control, manage, supervise, direct, or

own all or part of an unlicensed money

transmitting business. 18 U.S.C. § 1960. The

statute defines three alternative forms of an

"unlicensed money transmitting business." A

money transmitting business is unlicensed if it

affects interstate or foreign commerce and: (1)

operates without an appropriate money

transmitting license in a state where such

operation is punishable as a misdemeanor or

felony, § 1960(b)(1)(A); (2) fails to comply with

the money transmitting business registration

requirements under section 5330 of Title 31 and

the implementing regulations, § 1960(b)(1)(B); or

(3) involves the transportation or transmission of

funds that are known to the defendant to have

been derived from a criminal offense or are

intended to be used to promote or support

unlawful activity, § 1960(b)(1)(C).

The state licensing and federal registration

prongs have comparable elements. The

government must prove: (1) the defendant

knowingly conducted a money transmitting

business; (2) the business affected interstate or

foreign commerce; (3) the business was

unlicensed under state law [or failed to register

under federal law]; (4) the state [or federal

government] required a license [or registration];

and (5) in the case of the state licensing prong,

state law punished the lack of a license as a

misdemeanor or felony.

To date, virtually all known § 1960

prosecutions have been brought under either the

state licensing or federal registration prong, and

thus the elements of those prongs are discussed in

greater detail below. The third prong—what might

be termed the "money laundering/reverse money

laundering prong" because it resembles a money

laundering statute–has not received much

attention.

A. Defendant knowingly conducts, controls,

manages, supervises, directs, or owns a

money transmitting business

Knowingly. In the wake of the Supreme

Court's 1994 decision in United States v. Ratzlaf,

510 U.S. 135 (1994), a concern arose that courts

would construe the former "intent" element in the

state licensing prong of § 1960 to require proof

that defendant knew of the state licensing

requirement and that state law punished it as a

misdemeanor or felony. In the USA PATRIOT

Act, Congress addressed this concern. It amended

the state licensing prong of § 1960 to eliminate

the "intent" element. As if to put an exclamation

point on this deletion, Congress added language in

the statute making it clear that the state licensing

prong is violated "whether or not the defendant

knew that the operation was required to be

licensed or that the operation was so punishable."

18 U.S.C. § 1960(b)(1)(A). Judicial decisions

have now confirmed that neither the state

licensing prong nor the federal registration prong

of § 1960 requires proof that the defendant knew

of the licensing or registration requirements or

knew of the consequences of the failure to license

or register. See, e.g., United States v. Talebnejad,

460 F.3d 563, 568-70 (4th Cir. 2006), cert.

denied, 127 S. Ct. 1313 (2007); United States v.

Keleta, 441 F. Supp. 2d 1 (D.D.C. June 28, 2006);

United States v. Uddin, 365 F. Supp. 2d 825 (E.D.

Mich. 2005).

Conducts, controls, manages, supervises,

directs, or owns. The statute's licensing and

registration prongs do not punish "money

transmitting" per se, and they do not punish the

existence of an unlicensed money transmitting

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 37

business. Instead, § 1960 makes it a crime to

conduct, control, manage, supervise, direct, or

own an unlicensed money transmitting business.

Sanabria v. United States, 437 U.S. 54, 70 (1978)

(allowable unit of prosecution under § 1955 is

participation in a single illegal gambling business;

Congress did not define discrete acts of gambling

as independent federal offenses). Significantly,

the Supreme Court explained in Sanabria that

§ 1955 proscribes any degree of participation in

the illegal gambling business (except by mere

bettors). See Sanabria, 437 U.S. at 70-71 and

n.26. Thus, we would have expected courts to

construe § 1960 similarly to reach all participants

in the business, except customers. However,

without addressing Sanabria, the Fourth Circuit in

Talebnejad, construed the language "conducts,

controls, manages, supervises, directs, or owns" to

mean that "[c]riminal liability is... directed toward

those who are, in some substantial degree, in

charge of the operation; the statute does not reach

mere employees." 460 F.3d at 272. This

construction of § 1960 is difficult to reconcile

with Sanabria, which construed the almost

identical terminology much more broadly,

especially given that Congress modeled § 1960

after the very statute the Supreme Court construed

in Sanabria. Nonetheless, unless overruled, the

Talebnejad decision may restrict the government's

ability in the Fourth Circuit to charge culpable

employees (and perhaps even passive owners) of

the money transmitting business under the state

licensing and federal registration prongs.

Money transmitting. As discussed above,

§ 1960(b)(2) defines "money transmitting" to

include transfers of funds on behalf of the public

by any and all means, including, but not limited

to, transfers within this country or to locations

abroad by wire, check, draft, facsimile or courier.

In an ordinary sense, the term "transfer" means to

move or send money to a different location. See

Webster's Third New Int'l Dictionary 2427 (1993).

This definition–considered in the context of the

legislative history discussed above–gives reason

to doubt whether check cashing, currency

exchanging, and similar activities come within the

ambit of § 1960. Neither a check cashing business

nor a currency exchange business moves or sends

money from one location to another, so much as

they exchange one form of currency for another,

or exchange a check for currency. That said, the

term "transfer" in § 1960(b)(2) appears to be

broad enough to encompass hawala and other

alternative-value type transfer activities in which

funds do not physically, or even electronically,

move in the transaction. Cf. United States v.

Dinero Express, Inc., 313 F.3d 803, 806 (2d Cir.

2002) ("Because money is inherently fungible, a

person is sensibly considered to have engaged in a

'transfer' of money whenever he accepts money in

one location and, pursuant to an overall course of

conduct, causes the delivery of related money to

another location."); see also Stefan D. Cassella,

Application of Section 1960 to Informal Money

Services Businesses, Criminal Law Bulletin 590

(West, Sept.-Oct. 2003).

Business. The statute requires proof of an

unlicensed money transmitting business. The

business requirement ensures that persons cannot

be convicted for a single, isolated instance of

improper transmittal of money not shown to be

part of a business. United States v. Velastegui, 199

F.3d 590, 595 n.4 (2d Cir. 1999). Embedded in

the definition of "money transmitting" is a similar

restriction. That definition specifies that money

transmitting includes transfers conducted "on

behalf of the public," suggesting that the

remittance activity must be conducted on behalf

of a third person or persons. These two

requirements, i.e., the requirement that the

government prove the existence of a business, and

prove that the funds were transferred on behalf of

the public, may therefore preclude prosecution of

an isolated instance of money transmitting and of

transmissions conducted on behalf of oneself.

Proof of the existence of a business may take

many forms. Proof may come in the form of

ledgers and receipts documenting money

transmission on behalf of third persons. It may

also take the form of representations made

through advertisements, through applications for

general business permits, and through

representations made in account opening

documents maintained by banks handling the

money transmitter's transactions.

B. Affects interstate or foreign commerce

The second element of the statute requires

proof that the business affects interstate or foreign

commerce in any manner or degree. In most cases,

the money transmitting business either directly

transmits funds in interstate or foreign commerce,

or uses a financial intermediary, e.g., a federally-

insured bank, to do so. In either case, proof that

the business engages in transactions in interstate

or foreign commerce will satisfy the interstate

commerce element. See, e.g., United States v.

Oliveros, 275 F.3d 1299, 1304 (11th Cir. 2001)

38 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

(handing over a check implicates interstate

commerce if subsequently the check is deposited

in a bank; bank's involvement can be incidental

and need not be integral to the particular

transaction charged as money laundering). In the

case of a hawala-type transfer system that operates

entirely outside the financial system, proof may

take the form of interstate or transnational

communications between hawaladars.

C. The business is unlicensed under state

law [or fails to register under federal law]

The Talebnejad decision tells us that the

statute's mental state requirement (knowledge)

applies to the first three elements of the offense,

that is, the factual elements. The knowledge

requirement does not apply to the last two

elements, the legal elements. This means that the

government must prove that the defendant

charged with conducting the unlicensed money

transmitting business knew that the business

lacked the requisite license and/or registration,

even though the government does not have to

prove that the defendant knew about the licensing

and/or registration requirement. Apart from

raising an interesting metaphysical question–can

someone know that he or she lacks a license

without knowing of the licensing requirement–the

knowledge requirement may leave room for a

defendant to offer an objective mistake-of-fact

defense. Arguably, for example, it is a defense to

a § 1960 charge if the defendant establishes an

objectively reasonable, but mistaken belief that

his or her business partner had secured the

requisite license and/or registration. It is not,

however, a defense that the defendant

subjectively, but unreasonably believed, for

example, that a business permit sufficed to operate

a money transmitting business, or mistook the

law, or received bad legal advice. See, e.g.,

United States v. Cross, 113 F. Supp. 2d 1253,

1256, 1262 (S.D. Ind. 2000) (because offense of

operating an illegal gambling business was a

general intent crime, advice of counsel was

unavailable as a defense to that crime).

D. The state [or federal government]

requires a license [or registration]

State licensing requirements. FinCEN

maintains a list of states that have enacted some

form of licensing requirement for money

transmitting businesses. See http://www.msb.gov/

pdf/msbstatecontactsfinal.pdf. Care should be

taken in reading these state licensing provisions.

Some states, for example, impose licensing

requirements, but only for businesses engaged in

international money transmitting. See, e.g., Cal.

Fin. Code § 1800.5; see also Mass. Gen. L. Ch.

169, § 16; N.J. Rev. Stat. § 17:15C-2. Other states

may define the licensing requirement in terms that

reach only money transmission activities that

occur within the state. See, e.g., United v. Bah,

2007 WL 1032260 (S.D.N.Y. Mar. 30, 2007)

(collecting money in New York for transmission,

where transmission activity itself occurs in New

Jersey, does not implicate New York's money

transmitter licensing requirement).

The federal registration requirements. Law

enforcement agents and prosecutors should

exercise special caution when investigating and

prosecuting a case under the federal registration

prong of § 1960. The federal registration

regulations contain ambiguities and exceptions.

See FinCEN and IRS Need to Improve and Better

Coordinate Compliance and Data management

Efforts, GAO-07-212 at 12 (Dec. 2006)

(characterizing the regulations as "confusing and

easily misinterpreted"). To begin, the regulations

do not use the term "money transmitting

business," even though that is the term Congress

used in both § 1960 and in 31 U.S.C. § 5330, the

statute creating the federal registration

requirement. The regulations instead introduce a

term alien to the statutory scheme, "money

services business." In addition, the regulations

carve up the registration requirement with

numerous exceptions. For example, money

transmitters that merely act as an agent of a

registered money transmitter do not have to

§ 103.41(a)(2) (2006). These exceptions,

particularly the agency exception, have made it

difficult for law enforcement agencies, money

transmitting business examiners, and banks, to

identify whether a money transmitter is subject to

the registration requirement.

If § 1960 applied to other forms of money

services businesses other than money transmitters,

e.g., check cashers, then the regulatory framework

becomes even more complicated. Some money

services businesses (i.e., issuers and redeemers of

stored value) have been completely exempted

from the registration requirement (31 C.F.R.

§ 103.41(a)(2)), while others (e.g., check cashers)

qualify as a money services business only if they

handle more than a $1,000 on behalf of a single

customer in a single day. See 31 C.F.R.

§ 103.11(uu)(1)-(4).

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 39

E. State law punishes the lack of a license

as a misdemeanor or felony

The requirement that the state punish the

offense as either a misdemeanor or felony may

raise legal issues in at least two contexts. The first

context is where the state attaches misdemeanor or

felony penalties only upon proof that a defendant

"willfully" or "intentionally" violated the state

statute, i.e., proof that the defendant knew of the

licensing requirement. The Talebnejad court ruled

that Congress expressly rejected any mens rea

requirement with respect to the legal elements of

the state licensing prong of § 1960. 460 F.3d at

567.

The other context in which this element may

give rise to a legal issue is where the state statute

proscribes misdemeanor or felony penalties, but

only if a statutory precondition has been met. In

California, for example, unlicensed check cashers

are subject to misdemeanor penalties, but only if

they have first been cited for infractions. See Cal.

Civ. Code § 1789.37 (West 2006). If state law

provided for such a precondition to misdemeanor

or felony punishment, it is likely the government

would have to prove the precondition to satisfy

this element of the statute, because otherwise the

operation of the money transmitting business

would not be "punishable" as a misdemeanor or

felony under state law.

IV. Constitutional challenges and

defenses

The courts have, thus far, addressed numerous

constitutional challenges to § 1960, and rejected

them. Some defendants have raised equal

protection challenges to the state licensing prong.

They have challenged § 1960 on the ground that it

violates the Equal Protection Clause because it

assimilates the laws of some states, but not others.

These challenges have been uniformly rejected.

See, e.g., United States v. Barre, 324 F. Supp. 2d

1173, 1175-76 (D. Colo. 2004). Other challenges,

premised on fair notice, vagueness, and the rule of

lenity, have similarly been rejected.

Perhaps the most serious constitutional

challenge is the one raised in Talebnejad, 460

F.3d 563, 570. There, the defendants argued that

§ 1960's comparatively low mental state

requirement violated due process, citing

United States v. Lambert, 355 U.S. 225 (1957)

(striking down municipal ordinance that required

a convicted felon to register with the city, and

subjected the felon to criminal penalties, even if

he or she was unaware of the registration

requirement). The Talebnejad Court distinguished

Lambert. Unlike the situation in Lambert, which

involved wholly passive conduct, § 1960

criminalizes affirmative conduct, e.g., the conduct

or operation of an unlicensed money transmitting

business. Judge Gregory, in his partial dissent, left

room for the possibility that § 1960 might be

susceptible to an as-applied constitutional

challenge if the government used § 1960 to

prosecute, for example, a passive or minority

stakeholder in a money transmitting business.

Such facts would, in Judge Gregory's view,

resemble those in Lambert, and thus raise

concerns about whether the statute provided

constitutionally sufficient notice of possible

regulation. 460 F.3d at 576.

V. Sentencing and forfeiture

Sentencing. The Sentencing Commission has

placed § 1960 violations in two different sections

of the Guidelines, depending on which prong

forms the basis for the conviction. The

Commission analogized violations of the state

licensing and federal registration prongs of § 1960

to currency reporting offenses, and thus classified

those offenses under USSG § 2S1.3. See

Appendix C, amendment 634. However, the

Sentencing Commission analogized violations of

the proceeds/reverse money laundering prong of

§ 1960 to a money laundering offense, and

assigned it to USSG § 2S1.1. See Appendix C,

Amendment 655.

The Sentencing Commission's bifurcated

treatment of § 1960 may lead to sentencing

anomalies. A money transmitter that violates the

state licensing or registration prongs will be

sentenced based on the total amount of funds

transmitted, without regard to whether those funds

derived from a criminal source or were intended

for a criminal purpose. See United States v.

Bariek, 2005 WL 2334682 at *2 (E.D. Va. Sept.

23, 2005) (because § 1960 was enacted to prevent

terrorists, money launderers and other criminals

from exploiting unregulated banking systems, the

more money transmitted by an unlicensed

business, the more likely that some of that money

will find its way into criminal hands, and the

greater harm caused; it is thus appropriate to reach

a sentencing range determination based on the

amount transmitted). However, a defendant

sentenced under the money laundering/reverse

money laundering prong of § 1960 will be

40 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

sentenced based only on the total amount of the

funds involved in the particular money

laundering/reverse money laundering

transactions–a figure that may represent just a

small fraction of the total amount transmitted

through the business.

In the case of violations of the licensing and

registration prongs, defendants have variously

argued that USSG § 2S1.3(a) overstates the

seriousness of the § 1960 offense, and some of

these arguments have begun to gain traction in the

courts. For example, one defendant has

successfully argued, in a case based on a § 1960

violation of Virginia's state licensing requirement,

that the sentencing judge should take into account

the sentence that the defendant likely would have

received for the state law violation had he been

prosecuted in Virginia state court. See

United States v. Habbal, 2005 WL 2674999 at *4

(E.D. Va. Oct. 17, 2005) (in case where defendant

violated Virginia state licensing requirement, but

complied with federal registration requirement,

court took into account sentence defendant would

have faced if prosecuted in state court for

licensing offense); United States v. Clark, 434

F.3d 684 (4th Cir. 2006) (Motz, J., dissenting).

Defense attempts to qualify for a reduced

advisory guideline range under the § 2S1.3(b)(2)

safe harbor provision have been less successful.

To qualify, money transmitters would have to

show, among other things, that the funds they

transmitted on behalf of their customers derived

from a lawful source and were intended for a

lawful purpose. In most cases with a probable or

even possible money laundering nexus, the money

transmitters will be unable to make that showing

because he or she will not be able to establish that

the customers of the money transmitter derived

their funds from legitimate sources. United States

v. Abdi, 342 F.3d 313 (4th Cir. 2003).

Forfeiture. Federal law subjects all property,

real or personal, involved in a transaction or

attempted transaction in violation of § 1960, or

any property traceable to such property, to civil

and criminal forfeiture. This means that the

forfeiture may include all property involved in the

operation of the money transmitting business

itself, including its business assets. See Stefan D.

Cassella, Asset Forfeiture Law in the

United States, § 27-5 (JurisNet 2007). It also

means that the forfeiture may include the funds

being transmitted by a money transmitter who is

acting in violation of the statute. Id.

The potential breadth of forfeiture under

§ 1960 may give rise to two issues. First, an issue

may arise whether customers of an unlicensed

money transmitting business have standing to

contest the forfeiture of funds seized from the

business, when those funds are linked to

transactions the customers initiated through the

business. See, e.g., United States v. 47-10-Ounce

Gold Bars, No. CV 03-955-MA, 2005 WL

221259 (D. Ore. Jan. 28, 2005). Second, in cases

prosecuted under the state licensing and federal

registration prongs, claimants and defendants may

raise an excessive fines defense comparable to

that which was raised in United States v.

Bajakajian, 524 U.S. 321, 326 (1998). Bajakajian

is distinguishable. Unlike Bajakajian, which

involved a one-time failure to file a report, a

violation of the state licensing and registration

prongs necessarily involves at least an ongoing

failure to act. Cf. United States v. Wallace, 389

F.3d 483, 487 (5th Cir. 2004) ("Obviously, he was

operating an unregistered airplane on an ongoing

basis, as opposed to the one time violation in

Bajakajian"). Moreover, cases prosecuted under

the money laundering/reverse money laundering

prong of § 1960 are even less likely to raise

Excessive Fines Clause issues because the

Excessive Fines Clause has no application to the

forfeiture of crime proceeds.

VI. Conclusion

Section 1960 is an extraordinarily powerful

statute—one that greatly enhances the

government's ability to combat drug money

laundering and terrorist financing. However,

because of the interplay between the statute, state

law, and federal regulations, § 1960 can be a

difficult statute to use in practice. Prosecutors are

encouraged to contact the Asset Forfeiture and

Money Laundering Section when considering a

prosecution or forfeiture under this statute.

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 41

ABOUT THE AUTHOR

Courtney J. Linn is an Assistant U.S. Attorney

in the Eastern District of California, and wrote

this article while on detail this past year to the

Asset Forfeiture and Money Laundering Section

of the Criminal Division. A longer version of this

article will appear later this year in the UC Davis

Business Law Journal. See http://blj.ucdavis.edu.

The author and the Office of Legal Education

thank the UC Davis Business Law Journal for

allowing this digest version of the article to be

made available to prosecutors prior to the article's

publication.a

Bulk Cash Smuggling

Rita Elizabeth Foley

Assistant United States Attorney

Eastern District of Michigan

I. Introduction

Google the phrase "bulk cash smuggling" and,

in less than one second, more than 11,000 search

results will pop up. Many of those hits will, in

some way, reference Title 31 of the United States

Code, specifically Section 5332, which is often

referred to as the Bulk Cash Smuggling Act of

2001. The criminalization of bulk cash smuggling

clearly gained sudden impetus following 9/11.

The Bulk Cash Smuggling Act was reintroduced

in the House of Representatives as a bill, H.R.

2920, 107th Cong. (2001), on September 20,

2001. Section 5332 of Title 31 of the

United States Code was enacted on October 26,

2001 as part of the USA PATRIOT ACT (Uniting

and Strengthening America by Providing

Appropriate Tools Required to Intercept and

Obstruct Terrorism Act [USA PATRIOT ACT] of

2001), USA PATRIOT ACT, Pub. L. No. 107-56,

Tit. III, § 371, 115 Stat. 272 (2001).

The initial push to heighten awareness of bulk

cash smuggling as a serious offense, however,

came in 1998, as the government responded to the

decision of the United States Supreme Court in

U.S. v. Bajakajian, 524 U.S. 321 (1998). The

Bajakajian decision has been reviewed and

discussed at length since its issue. In short, the

Supreme Court held that forfeiture of the entire

amount of $357,144 in U.S. currency seized from

Mr. Bajakajian was excessive. The Court reasoned

that, since the wrongful act was a mere failure to

file a report in violation of 31 U.S.C. § 5316,

forfeiture of the entire amount of the seized

currency was grossly disproportional to the

gravity of the offense, and violated Mr.

Bajakajian's Eighth Amendment right to be

protected from excessive fines. Ultimately, the

Court ruled that Mr. Bajakajian only had to forfeit

$15,000 of the $357,144 in currency.

II. Legislative history

In 1998, following the Bajakajian decision,

the United States Department of Justice

(Department) submitted a proposal to Congress, to

amend Title 31 of the United States Code. The

Department's proposal suggested that the act of

bulk cash smuggling should be made a criminal

offense, and that the United States should be

empowered to seize and forfeit smuggled currency

in accordance with the forfeiture provisions of

Title 18 of the United States Code. The

Congressional Record clearly states the legislative

intent behind what would eventually become the

Bulk Cash Smuggling Act of 2001, 31 U.S.C.

§ 5332.

Confiscation of the smuggled currency is, of

course, the most effective weapon that can be

employed against these smugglers.

Accordingly, in response to the Bajakajian

42 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

decision, the Department of Justice proposed

making the act of bulk cash smuggling itself a

criminal offense, and to authorize the

imposition of the full range of civil and

criminal sanctions when the offense is

discovered. Because the act of concealing

currency for the purpose of smuggling it out

of the United States is inherently more serious

than simply failing to file a Customs report,

strong and meaningful sanctions, such as

confiscation of the smuggled currency, are

likely to withstand Eighth Amendment

challenges to the new statute.

144 Cong. Reg. H9478 (1998).

Citation to the legislative history describing

the intent of 31 U.S.C. § 5332 may be useful in

explaining to a court why Bajakajian should no

longer be the applicable standard in determining

the proportionality of the forfeiture in bulk cash

smuggling cases.

III. Elements of the criminal offense

The following four items must be proved

beyond a reasonable doubt, to establish a criminal

violation of 31 U.S.C. § 5332.

• Intent to evade a § 5316 currency reporting

requirement.

• Knowing concealment of more than $10,000

(in currency or other monetary instruments).

• On a person, or in a conveyance, luggage or

container.

• Transport or transfer (or attempt to transport

or transfer) from inside U.S. to outside U.S.

See Figure 1, page 47.

The first hurdle is to prove that the defendant

intended to evade the currency reporting

requirement. Here, the prosecutor's knowledge of

the type, extent, and nature of the defendant's

contact with the border patrol officer or agent at

the port of exit becomes crucial. Was the

defendant made aware of the § 5316 reporting

requirement? Was the defendant a frequent

international traveler? Had the defendant

completed Currency and Monetary Instrument

Reports (CMIRs) on previous travels? Was the

defendant offered the opportunity to complete (or

to amend) his or her CMIR? What was the

defendant's ability to speak, read, and understand

spoken or written English? Was the CMIR offered

in an alternative language? If the prosecutor

cannot establish this threshold element of intent to

evade the currency reporting requirement, the

criminal prosecution under § 5332 will fail.

The second element, that of "knowing

concealment," may be an easier picture to paint

for the judge or jury. The familiar proverb—"a

picture is worth a thousand words"—rings true in

bulk cash smuggling. The prosecutor who is

fortunate enough to work with law enforcement

officers who have the foresight to take

photographs of the concealed currency, at the time

of the encounter with the traveler or his luggage,

vehicle, or package, is blessed with an easier task

of proving the knowing concealment of the

currency. Cash, even large sums, which are

merely carried in a coat pocket, a wallet or purse,

or even packed in luggage, without evidence of

some effort to conceal it within the lining of the

suitcase, trap, compartment, or hidden pocket, will

generally not be sufficient to demonstrate that the

defendant "knowingly concealed" the currency.

Proving that the crime involved "currency or

monetary instruments" requires familiarity with

the applicable definition of "monetary

instruments." With respect to bulk cash smuggling

offenses, the Code of Federal Regulations, at 31

C.F.R. § 103.11(u)(1)(i)-(v), defines "monetary

instruments" as follows.

• Currency.

• Traveler's checks in any form.

• All negotiable instruments (including personal

checks, business checks, official bank checks,

cashier's checks, third-party checks,

promissory notes (as that term is defined in

the Uniform Commercial Code), and money

orders)) that are either in bearer form,

endorsed without restriction, made out to a

fictitious payee (for the purposes of § 103.23),

or otherwise in such form that title thereto

passes upon delivery.

• Incomplete instruments (including personal

checks, business checks, official bank checks,

cashier's checks, third-party checks,

promissory notes (as that term is defined in

the Uniform Commercial Code), and money

orders)) signed but with the payee's name

omitted.

• Securities or stock, in bearer form or

otherwise, in such form that title thereto

passes upon delivery.

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 43

"Monetary instruments do not include warehouse

receipts or bills of lading." 31 C.F.R.

§ 103.11(u)(2).

One emerging problem in bulk cash

smuggling, from a law enforcement perspective, is

the "stored value card." Currently, the definition

of "monetary instruments," for purposes of

prosecuting bulk cash smugglers or forfeiting

seized assets pursuant to § 5332, does not include

the stored value cards. According to the Federal

Reserve Bank of New York:

There are two main categories of stored value

cards in the marketplace. The first prepaid

cards made available to the marketplace were

single-purpose or "closed-loop" cards. Gift

cards, which can only be used to purchase

goods at particular retailers, and prepaid

telephone cards, which can only be used to

make telephone calls, are examples of single-

purpose cards. The second type of card to

emerge was a multipurpose or "open-loop"

card, which can be used to make debit

transactions at a wide variety of retail

locations, as well as for other purposes, such

as receiving direct deposits and withdrawing

cash from ATMs. Some multi-purpose cards

are branded by Visa or MasterCard and can be

used wherever those brands are accepted.

Federal Reserve Bank of New York, Stored Value

Cards: An Alternative for the Unbanked? (July

2004), available at http://www.ny.frb.org/regional

/stored_value_cards.html.

Border agents and officers do not yet have a

consistent capability to check the available

balances of stored value cards, to determine

whether the card's available value exceeds the

$10,000 threshold element set forth in 31 U.S.C.

§ 5332. Even if federal law enforcement agents

had the ability to check the balances of these

cards, the "open-loop" typed cards do not fall

within the definition of monetary instruments for

bulk cash smuggling prosecutorial or forfeiture

purposes.

Another noteworthy facet of the Bulk Cash

Smuggling Act is the requirement that the

United States prove the transportation or transfer,

or attempted transportation or transfer, of the

currency or monetary instruments from a point

inside the United States to a point outside the

United States, or from a point outside the

United States to a point inside the United States.

The transportation or transfer element assumes

that a border has been crossed. The "attempt"

language, however, permits the government to

charge § 5332 where the investigation is able to

establish a border crossing was intended and/or

was imminent. This unique language of § 5332

allows prosecutors to charge bulk cash smuggling

and/or to bring civil forfeiture actions against

currency or monetary instruments seized during

"pipeline" stops. In U.S. v One 1988 Chevrolet

Cheyenne Half-Ton Pickup Truck, 357 F. Supp.

2d 1321 (S.D. Ala. 2005), the government

successfully filed a civil forfeiture action against

$313,030 in U.S. currency, and against the pick-

up truck which was fitted with two traps that

contained the $313,030 in currency. The district

court held that the volume of money hidden in the

truck, along with a canine alert and the manner of

packaging, was probative of illegal drug activity.

However, with respect to forfeiture under 31

U.S.C. § 5332, the court stated:

The argument in favor of civil forfeiture under

the Bulk Cash Smuggling Act may be even

more compelling. If the Court understands

Aguila's position properly, he contends that he

brought the truck, laden with several hundred

thousand dollars in concealed U.S. currency

in small bills, across the Mexico-U.S. border

more than a week prior to its seizure. There is

no evidence that Aguila ever reported such a

massive quantity of cash to U.S. officials

before bringing it across the border, as

required by the currency reporting

requirements of 31 U.S.C. § 5316. Indeed,

Aguila's having concealed the currency in

secret compartments is compelling evidence

that he "with the intent to evade a currency

requirement under section 5316, knowingly

conceal[ed] more than $10,000 in currency"

in the truck, in violation of the Bulk Cash

Smuggling Act, 31 U.S.C. § 5332(a)(1). Such

a violation would in turn subject the cash and

the vehicle to the civil forfeiture provisions of

that Act, under § 5332(c)(1)-(3).

Id. at 1331 n.18.

The civil forfeiture action was filed in

Alabama, which does not share a land border with

a foreign country. Thus, even judicial districts

which do not see a high volume of the traditional

border nexus cases may see cash seizures develop

into bulk cash smuggling cases.

44 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

IV. Asset forfeiture

Title 31 provides for both criminal and civil

forfeiture of currency and monetary instruments

involved in bulk cash smuggling. In fact, criminal

forfeiture is fairly broad and mandates the

forfeiture of any property, real or personal,

involved in, or traceable to, the bulk cash

smuggling offense. Many experts agree that bulk

cash smuggling may now be the most common

form of money laundering. Thus, it is appropriate

that the forfeiture provisions of the bulk cash

smuggling statutes mirror the "involved in or

traceable to" language of the forfeiture provisions

governing money laundering. "[T]he court, in

imposing sentence [for bulk cash smuggling under

31 U.S.C. § 5332(a)(1)]..., shall order that the

defendant forfeit to the United States, any

property, real or personal, involved in the offense,

and any property traceable to such property." 31

U.S.C. § 5332(b)(2).

Prior to December 17, 2004, the statute

contained the language "subject to subsection

(d)." However, subsection (d) was never enacted

by Congress. Subsection (d) would have set forth

the mitigating factors to be considered by the

courts in determining whether the amount to be

forfeited should be reduced. However, this error

was corrected when Pub. L. No. 108-458, 118

Stat. 3638, Title VI, § 6203(h), December 17,

2004, amended the statute, where § 6203(h)(1)

struck, "subject to subsection (d) of this section"

following "property" and § 6203(h)(2) struck,

"subject to subsection (d) of this section,"

following "may be seized and." Thus, claimants

no longer may argue that the statute is

"unconstitutionally vague" because of the absence

of subsection (d). See U.S. v Hansen, No. 2:04-

CR-00091, Order Denying Defendant's Motion to

Dismiss Count Two of the Indictment as to Erik

Hansen (Docket No. 65, S.D. Ohio Oct. 20,

2004).

Title 31 also provides that, "[a]ny property

involved in a violation of [31 U.S.C. § 5332(a)]...,

or a conspiracy to commit such violation, and any

property traceable to such violation or conspiracy,

may be seized and forfeited to the United States."

31 U.S.C. § 5332(c). Civil forfeiture proceedings

may be brought against any property "involved

in" the bulk cash smuggling offense, including:

any currency or other monetary instrument

that is concealed or intended to be concealed

in violation of subsection (a) or a conspiracy

to commit such violation, any article,

container, or conveyance used, or intended to

be used, to conceal or transport the currency

or other monetary instrument, and any other

property used, or intended to be used, to

facilitate the offense....

31 U.S.C. § 5332(c)(3).

Prosecutors may wish to proceed with civil

forfeiture proceedings parallel to any criminal

prosecution, or may elect to proceed with civil

forfeiture alone. The evidence, in some instances,

may not be sufficient to meet the "beyond a

reasonable doubt" burden of proof inherent in a

criminal case. That same evidence, however, may

be more than adequate to prove forfeitability of

the asset by a preponderance of the evidence, in a

civil case.

Assets seized in conjunction with a violation

of 31 U.S.C. § 5332 may also be administratively

forfeited. In general, all property subject to

forfeiture may be forfeited administratively

except:

• real property (see 18 U.S.C. § 985);

• personal property having a value > $500,000,

unless it is:

a. merchandise, the importation of which is

prohibited,

b. a vessel, vehicle or aircraft used to import,

export, transport or store controlled

substance, or

c. a monetary instrument (as defined by 31

U.S.C. § 5312(a)(3) - but NOT bank

accounts! (see 19 U.S.C. § 1607); and

• property forfeitable under a statute that does

not incorporate Customs laws (see, e.g. 18

U.S.C. § 492, related to counterfeiting).

Asset Forfeiture Policy Manual (Jan. 2007) Chap.

2 Sec. I.A.

V. Sentencing

According to the United States Sentencing

Commission, Guidelines Manual § 2S1.3 (Nov.

2006), a bulk cash smuggling conviction, in

violation of 31 U.S.C. § 5332, will result in a base

offense level of 6. The offense level must then be

adjusted according to the amount of the currency

or monetary instruments which were smuggled,

utilizing the Theft and Fraud Table set forth in

§ 2B1.1. USSG § 2S1.3. The minimum amount

that must be added to the base offense level for

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 45

bulk cash smuggling offenses is 4 levels for "more

than $10,000." (Any amount less than $10,000

would not satisfy the threshold element of

§ 5332.) The maximum amount that may be added

to the base offense level for bulk cash smuggling,

from the Theft and Fraud Table in § 2B1.1, is 30

levels (for an amount more than $400 million).

After adjusting the base offense level

according to the amount of the smuggled currency

or monetary instruments, 2 levels should also be

added if the conviction is for bulk cash

smuggling. USSG § 2S1.3(b)(1). This two-level

increase for bulk cash smuggling has been upheld,

over the defendant's objection that the

enhancement constituted "double counting." See

U.S. v. Meza-Quinones, 2006 WL 504282 (W.D.

Tex. Feb. 15, 2006).

For purposes of illustration, assume that the

traveler is convicted of bulk cash smuggling in

violation of 31 U.S.C. § 5332, and that he had

smuggled $350,000 in cash. According to the

Guidelines Manual, the base offense level would

be 6. USSG § 2S1.3. Because the amount

involved is more than $200,000 but less than

$400,000, the traveler would receive a 12 level

increase based on the Theft and Fraud Table.

USSG §2 B1.1. Additionally, because the traveler

was convicted of bulk cash smuggling, two

additional levels are added pursuant to

§ 2S1.3(b)(1). Thus, the traveler's adjusted offense

level is 6+12+2=20. If the traveler's criminal

history falls within Category I (zero or one

criminal history points), the recommended

sentencing range under the Guidelines Manual is

33-41 months of imprisonment. USSG § 5A. This

represents a significant increase from the

sentencing guidelines antecedent to the Bulk Cash

Smuggling Act where, based on an application of

the November 2000 Sentencing Guidelines,

smuggling $350,000 (a violation of 31 U.S.C.

§ 5316) would have resulted in a sentence

recommendation of only 15-21 months.

VI. Mitigation

If the evidence establishes that the bulk cash

smuggler was not engaged in any other criminal

endeavor, it may be necessary to balance the

criminal act(s) versus the amount of the seizure.

The mitigation was originally addressed in the

draft version of 31 U.S.C. § 5332 as subsection

(d). However, since the statute is now silent as to

the mitigating factors, the courts must consider

whether mitigation is appropriate on a case-by-

case basis. To seek mitigation, the smuggler has

the burden of proving that the currency was from

a legitimate source, and was not intended for any

unlawful purpose.

Tax evasion is one such "unlawful purpose"

that a court may find weighs against mitigation of

the forfeiture. Courts may justify full forfeiture of

currency or monetary instruments in "clean

money" cases. Many outbound CMIR and bulk

cash smuggling violations may involve situations

where the funds were earned legally, but the

smuggler wanted to evade tax consequences.

Thus, although the funds may be from a legitimate

source, if they are intended for an unlawful

purpose—tax evasion—the claimant should not be

entitled to mitigation of the forfeiture.

In U.S. v. Six Negotiable Checks in Various

Denominations Totaling One Hundred Ninety-

One Thousand Six Hundred Seventy-One Dollars

and Sixty-Nine Cents, 389 F. Supp. 2d 813, (E.D.

Mich. 2005), a traveler was about to embark on a

flight outbound from Detroit to Tel Aviv. The

traveler declared that he was carrying $9,000, but

he actually had $8,500 in currency, and thirteen

checks (six of which were negotiable) totaling

$250,671.69. The government argued that the

traveler's purpose for the CMIR violation was tax

evasion. The court held both that forfeiture was

proper and that forfeiture of the full amount of the

seized monies was not excessive. The court based

its decision on the following rationale: (1) tax

evasion is not a lawful purpose; (2) fines for tax

evasion, willful failure to file a tax return, and

CMIR violations ranged from $25,000-$250,000;

and (3) while the amount of forfeiture was

somewhat greater than the $250,000 maximum

fine, it was not so much greater that it constituted

a "gross disproportionality." Id. at 826.

VII. Law enforcement: why do we need

§ 5332?

The effective enforcement of the Bank

Secrecy Act forces drug dealers, and other

criminals engaged in cash-based businesses, to

avoid use of domestic banks and legitimate money

transmitting businesses. A drug dealer who wires

millions to his account in some island banking

destination creates the risk of a financial

institution generating a Currency Transaction

Report, or a Suspicious Activity Report. Thus, in

order to avoid banks, the criminals are forced to

move large quantities of currency in bulk from, to,

46 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

and through, airports, border crossings, and ports

of entry, in order to eventually deposit their ill-

gotten gains into foreign bank accounts.

While narcotics trafficking accounts for a

substantial portion of currency smuggling, not all

bulk cash smuggling involves narcotics proceeds.

Alien smuggling and the smuggling of firearms

and weapons are two of the fastest growing

criminal enterprises, in terms of the amount of

cash proceeds generated by the crime. Human

trafficking is largely a cash-based business where

the cash generated in the United States finds its

way back to the country from whence the victims

are kidnaped or indentured. Bulk cash smuggling

is also an easy way to funnel monies in material

support of terrorism. Border cash seizures may

also represent the proceeds from the sale of

imported counterfeit merchandise, or may even be

monies wrongdoers are carrying across the border

for the purpose of bribing foreign officials, and

ultimately continuing to smuggle illegal imports

or exports.

The transportation and smuggling of cash

across our borders may now be the most common

form of money laundering. Even the courts have

recognized that, in the end, legitimate businesses

simply do not smuggle loads of currency across

the border to bring their transactions to fruition.

A common sense reality of everyday life is

that legitimate businesses do not transport

large quantities of cash rubber-banded into

bundles and stuffed into packages in a

backpack. They don't, because there are

better, safer means of transporting cash if one

is not trying to hide it from the authorities....

U.S. v. $242,484, 389 F.3d 1149, 1161 (11th Cir.

2004).

In sum, the Bulk Cash Smuggling Act, 31

U.S.C. § 5332, despite its relative youth, is an

effective law enforcement tool that assists the

efforts of the United States to stem the flow of

unreported cash into and out of the country.

Interestingly, the necessity for the statute may, in

some ways, be attributed to law enforcement

itself. Strict implementation and monitoring of

financial institutions' compliance with the Bank

Secrecy Act effectively shifted the movement of

criminal proceeds out of the channels of

mainstream commerce, and into the underground

bulk cash movement. It is an exciting period as

new developments in case law continue to emerge

and shape the practice of both prosecutors and

those on the front line of our borders.

VIII. Acknowledgment

Much of what the author has learned of bulk

cash smuggling is directly attributable to the

expertise of Stefan D. Cassella, Bulk Cash

Smuggling and the Globalization of Crime:

Overcoming Constitutional Challenges to

Forfeiture under 31 U.S.C. § 5332, 22 BERKELEY

J. INT' L L. 98 (2004). Mr. Cassella is the Deputy

Chief of the Legal Policy Unit, Asset Forfeiture

and Money Laundering Section, Criminal

Division, United States Department of Justice.

ABOUT THE AUTHOR

Rita Elizabeth Foley is an Assistant

United States Attorney in the Asset Forfeiture

Unit of the U.S. Attorney's Office in Detroit.

Before joining the U.S. Attorney's Office in 2002,

she served as Associate Counsel for the State of

Michigan Attorney Discipline Board.a

The viewpoints expressed in this article are those

of the author and do not in any way represent the

official position of the United States Department

of Justice.

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 47

Figure 1

48 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

Sources of Information in a Financial

Investigation

Alan Hampton

Special Agent

Internal Revenue Service

Criminal Investigation

I. Introduction

Financial investigations are critical to almost

every investigation undertaken by federal law

enforcement agencies. The profits which drive the

criminal organization, and the financial tools

which criminals use to protect those profits, are

the main points of vulnerability. Money motivates

the crime; money keeps the organization going;

protecting the money is the criminal's chief

concern. A financial investigation follows the

money in order to take down the criminal, as well

as the whole enterprise that supports the criminal

activity. In focusing on the economic organization

and motivation of the criminal enterprises,

financial investigations emerge as a powerful tool

in the law enforcement arsenal.

The author, while working in the New

Orleans and Dallas field offices for the past fifteen

years, has investigated cases involving legitimate

enterprises from commercial fishermen to

politicians and illegal ones from alien smuggling

to terrorism. Developing the financial side of

cases involves knowing where to look for large

transactions involving the movement of money

and acquisition of assets. Once the information is

gathered, it needs to be presented in a format

understandable to the audience. A threshold

challenge is mastering the financial investigative

tools available to most federal law enforcement

agencies, and learning how to extract information

from them.

The past few years have seen an explosion of

information available to law enforcement. The

following case example is illustrative of the

information needed to investigate the case, and the

steps required to get that information in usable

form for prosecution.

II. Case scenario

Gunvant Shah operated an unlicensed money

transmitting business, primarily in New Jersey

and Boston. He had a network of coconspirators

who funneled money through the bank accounts

of legitimate companies, into foreign countries, by

the use of a hawala system, thereby evading any

country's reporting requirements. See, David

Marshall Nissman, Hawala, UNITED STATES

ATTORNEYS' BULLETIN, May 2002, at 13. This

network allowed Shah to transfer illegal alien

smuggling fees from the United States back to the

alien smugglers in India and around the world.

Shah eventually cooperated and was sentenced for

his role in the scheme. United States v. Singh, No.

3:98-cr-00363-3 (N.D. Tex. July 22, 1999).

A. First steps

The subject(s) must be identified, the source

of the money must be ascertained, and the person

to whom the money is being sent must be located,

in order to obtain convictions and make full use of

asset forfeiture. Physical surveillance in the Shah

case showed the subject mailing envelope-sized

packages nearly every day, and trash runs

garnered phone records, bank statements, and

utility bills, among other things. From that

information, the subject was confirmed.

After identifying the subject, requests for

financial information were sent to the Financial

Crimes Enforcement Network (FinCEN) and

Internal Revenue Service (IRS) lead development

centers (LDC) to find any financial trends that

would shed light on Shah's activities. The FBI has

a unit in Savannah, Georgia, that provides the

same information as the IRS LDC, less tax return

information. Most federal agencies have a liaison

to FinCEN through whom FinCEN requests can

be sent.

At the same time these investigative avenues

were pursued, a mail cover was placed on the

subject's residence. It showed an inordinate

amount of incoming mail from an unusually high

number of individuals. Mail covers are obtained

by organizational requests to the U.S. Postal

Inspection Service. Mail covers record the

addressee and addressor of incoming mail to a

designated address for a specified period of time.

Grand jury subpoenas were issued to banks,

phone companies, and mail delivery services, such

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 49

as Federal Express (FedEx) and United Parcel

Service (UPS). It is important to get account

opening documents when subpoenaing bank

records, including the signature card and the

initial application. They can be used to show

ownership or control of the account, and link a

subject to other associated individuals.

Review of the data and information revealed

that the subject did not use traditional banking

methods exclusively. Search warrants for

packages that the subject mailed were obtained

and revealed that checks, money orders, and cash,

was being sent to various destinations around the

world. The details of the investigation were

relayed to FinCEN analysts, and they suggested

that the subject might be using an underground

money transfer system. Contact was made with a

FinCEN underground banking expert, and he

confirmed that the subject appeared to be using

the hawala system of money transfer.

"Hawala" is a term that describes an

alternative banking system that operates outside

of, or parallel to, "traditional" banking or financial

channels. The hawala transfer system emerged in

India and Southeast Asia, and predates the

introduction of western banking practices. The

individuals conducting the hawala transactions are

called hawaladars. It is currently a major

remittance system used around the world. It is but

one of several such systems; another well-known

example is the "chop," "chit," or "flying money"

system indigenous to China. Although these

systems are often referred to as "underground

banking," they often operate in the open with

complete legitimacy, and are often heavily and

effectively advertised.

In 1999 (effective in 2001), the Secretary of

the Treasury promulgated regulatory definitions

of certain nonbank financial institutions for

purposes of the Bank Secrecy Act (BSA), and

grouped the definitions into a separate category of

financial institutions called "money services

businesses" (MSBs). These businesses must

license with the state in which they do business (if

the state has a licensing requirement) and must

registration requirement applies. Forms for

registration are available on the FinCEN Web site

at www.fincen.gov. Failure to license and register

the business may result in prosecution under Title

18 U.S.C. § 1960, which makes it an offense to

conduct an unlicensed money transmitting

business. Importantly, proof that the funds

involved in the business derived from crime (or

were intended to promote crime) is not required to

obtain a § 1960 conviction. Numerous cases have

been prosecuted under § 1960 in recent years.

B. FinCEN

FinCEN also administers the BSA, our

nation's first and most comprehensive anti-money

laundering statute. The BSA requires depository

institutions, other financial institutions, and trades

vulnerable to money laundering, to take a number

of precautions against financial crime. These

precautions include filing and reporting certain

data about financial transactions possibly

indicative of money laundering, such as cash

transactions over $10,000 and suspicious

transactions. Over 15,000,000 BSA reports are

filed each year by thousands of U.S. financial

institutions, providing a wealth of potentially

useful information to agencies whose mission it is

to detect and prevent money laundering, other

financial crimes, and terrorism.

Accordingly, FinCEN makes available to

appropriate federal, state, and local law

enforcement, and regulatory agencies, the

following databases.

•Currency and Banking Retrieval System

(CBRS): This financial database consists of

reports that are required to be filed under the

BSA, such as data on large currency

transactions conducted at financial institutions

or casinos, suspicious transactions, and

international movements of currency or

negotiable monetary instruments. This

information often provides invaluable

assistance for investigators because it is not

readily available from any other source and it

preserves a financial paper trail for

investigators to track criminals' proceeds and

their assets. In general, CBRS data includes:

• Suspicious Activity Reports (SARs)

(filed by Depository Institutions,

Casinos, MSBs, Securities & Futures

Industries, Insurance Businesses).

• Currency and Monetary Instruments

Reports (CMIRs).

• Currency Transaction Reports

(CTRs).

• Casino CTRs.

• Reports of Over $10,000 Received in

a Trade or Business (Form 8300).

50 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

• Registration of Money Services

Business (RMSB).

• Foreign Bank Account Reports

(FBARs).

•Commercial Databases: Information from

commercially available sources plays an

increasingly vital role in criminal

investigations. Commercial databases include

information such as state corporations,

property, and people locator records, as well

as professional licenses, and vehicle

registrations.

• Law Enforcement Databases: FinCEN is

able to access various law enforcement

databases through written agreements with

each agency. FinCEN requests could also

include a USA PATRIOT Act § 314(a)

information request. A Section 314(a) form is

a request to FinCEN from a federal law

enforcement agent, and can be used in a

terrorism or major money laundering related

investigation. Once FinCEN receives the

request, FinCEN sends a notice for

information to financial institutions across the

country via a secure Internet Web site. The

request contains subject and business names,

addresses, and as much identifying data as

possible, to assist the financial industry in

searching their records. The financial

institutions must query their records for data

matches, including accounts maintained by

the named subjects during the preceding

twelve months and transactions conducted

with the subjects within the last six months.

Financial institutions have two weeks from

the transmission date of the request to respond

to the § 314(a) information request. If the

search uncovers any matching accounts or

transactions, the bank notifies FinCEN.

FinCEN prepares a report of "hits" and replies

to the agent within two weeks. The agent

determines whether or not to subpoena the

aforementioned records.

C. Next steps

A Title III wire telephone interception (phone

tap) was used during the Shah investigation,

which allowed the government to intercept

telephone calls in which Shah and coconspirators

discussed their plans. The phone tap also allowed

the government to intercept faxed items, which

included ledger sheets detailing the balances for

each of the hawaladars.

Shah collected currency and monetary

instruments used to pay for alien smuggling,

including cash, cashier's checks, money orders,

and personal checks, in New Jersey and Boston,

and typically sent money to India in three

different ways. The first system was a true direct

hawala transfer with hawaladars in India. Shah

called his connections in India and they

transferred the money to its destination. In return,

Shah sent money around the United States on

behalf of the hawaladars in India.

The second system was the transfer of

monetary instruments by FedEx to another

hawaladar who operated a Canadian company in

Toronto, Canada. The Canadian company then

wired money to companies through its network of

other hawaladars and eventually to India.

The third system utilized an international

metal brokerage company in New York with its

own network of money movement around the

world. Since all three avenues involved the

transfer of proceeds of a specified unlawful

activity (SUA), as defined in 18 U.S.C.

§ 1956(c)(7), all three avenues involved possible

money laundering violations, and the funds

involved in those transactions were, therefore,

subject to civil forfeiture under 18 U.S.C.

§ 981(a)(1)(A) & (C) and 28 U.S.C. § 2461(c).

III. Asset forfeiture

Title 18 U.S.C. § 981 allows for the civil

seizure and forfeiture of assets relating to 18

U.S.C. §§ 1956, 1957 (money laundering), 1960

(unlicensed money transmitting business), foreign

crimes, proceeds from other criminal violations

including offenses constituting an SUA,

automobile theft and car jacking, and assets of a

domestic or international terrorist. Section 982 is

the analog to § 981 that is used for criminal

forfeiture. In the case of some BSA violations,

(structuring and Currency and Monetary

Instrument Report (CMIR) violations)), 31 U.S.C.

§ 5317 provides for civil and criminal forfeiture.

Title 18 U.S.C. § 984 provides a statutory

exception to the usual rule regarding strict tracing

that would otherwise apply in civil forfeiture

cases brought under 18 U.S.C. § 981(a)(1)(A) or

31 U.S.C. § 5317(c)(2). Title 18 U.S.C. § 984

applies in any civil forfeiture action in which the

subject property is cash, monetary instruments in

bearer form, funds deposited in an account in a

financial institution, or precious metals. Any

identical property found in the same place or

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 51

account as the property involved in the offense

that is the basis for the forfeiture is subject to

forfeiture under 18 U.S.C. § 984.

For example, suppose a person placed

$10,000 in laundered funds in a bank account on

Monday and the account is seized for civil

forfeiture on Friday. Suppose also that, at the time

of the seizure, the balance in the account is

$10,000, but that in between these dates, on

Wednesday, the balance dropped to zero and

subsequently $10,000 in unlaundered funds are

deposited. Consequently, the $10,000 in funds

that remain on Friday cannot be strictly traced

back to the money laundering offense. In general,

the $10,000 seized on Friday is not the same

money as the laundered funds that were placed in

the account on Monday. Under a traditional

tracing analysis, the government would not be

able to forfeit the $10,000. Under 18 U.S.C.

§ 984, however, the government may forfeit the

$10,000 from the account, without regard to

fluctuations in the balance in the account. Any

action that utilizes § 984 to forfeit property, not

traceable directly to the offense that is the basis

for the forfeiture, must be commenced not more

than one year from the date of the offense.

IV. Information from foreign countries

Some of the information needed in the

example case scenario was in foreign countries.

The investigating agent had to determine the best

way to get usable information from them. Contact

with the agencies' attachés (IRS, FBI, ICE) can

sometimes yield quick, but nonevidentiary,

information. The Office of International Affairs

(OIA) in the Criminal Division of the Department

of Justice (Department) can advise regarding the

various foreign treaties and requests available

with foreign countries. The United States also has

tax treaties with certain countries.

Records requested through a tax treaty can

only be used for tax administration purposes, and

not other criminal charges. If a grand jury tax

investigation includes the investigation of money

laundering and other Title 18 charges, the records

obtained through the tax treaty are useable to

support the tax charges, but the jury would have

to be advised to ignore this evidence when

considering the other nontax charges. To avoid

this dilemma, consider using a different legal

method to obtain the records, such as Mutual

Legal Assistance Treaties (MLATs).

Generally speaking, there are two nontreaty

methods for obtaining foreign bank records. First,

the Bank of Nova Scotia subpoena can be used to

subpoena records, in overseas branches, from

banks that have branches in the United States. For

example, if the subject has an account with HSBC

in Hong Kong, the branch in the United States

may be served. However, prior to issuing such a

subpoena, a prosecutor must first obtain OIA

approval pursuant to guidelines set forth in the

Criminal Resource Manual. See United States

Attorneys' Manual § 9-13.525.

A second method to obtain foreign bank

records involves the use of 31 U.S.C. § 5318(k), a

provision added in the USA PATRIOT Act.

Section 5318(k) allows law enforcement agents to

get bank records from a foreign bank that has a

correspondent bank account in the United States.

Almost all the banks in the world have a

relationship with a bank in the United States,

therefore, most bank records are theoretically

within reach. The way it works is that the

§ 5318(k) subpoena is served on the

correspondent bank in the United States. The

foreign bank is then required to supply the records

or the U.S. correspondent bank may face fines of

up to $10,000 per day or until they terminate their

correspondent banking relationship. These

subpoenas are administrative and can only be

issued by the Secretary of the Treasury, the

Assistant Attorney General of the Criminal

Division, or the U.S. Attorney. Before any

§ 5318(k) subpoena can be issued, it must first be

approved by the Director of the OIA, who will

consult with the Chief of the Asset Forfeiture and

Money Laundering Section (AFMLS), as well as

the Treasury and State Departments. Approval for

such subpoenas has been granted only in a handful

of cases because the preferred method of

obtaining information concerning foreign bank

accounts is through the MLAT process.

FinCEN is also a member of the Egmont

Group, an international organization of Financial

Investigative Units (FIU). FinCEN, for example,

is the FIU for the United States. The Egmont

group maintains a Web site at

www.egmontgroup.org. The goal of the group is

to create a global network by fostering

cooperation between countries by sharing

information. Requests can be made through

FinCEN for additional information. Information

obtained through the FIU process is lead

information only and cannot be used as evidence

in judicial proceedings.

52 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

In the Shah investigation, an MLAT request

with Canada yielded bank records and an

interview with the Canadian hawaladar. Since

money laundering and informal banking in

Canada is legal and he did not know the source of

the funds, the witness answered all questions and

laid out the entire path of his financial network.

V. Internal Revenue Service Lead

Development Centers

Another excellent source of information is the

IRS Reveal system. The Reveal system provides

IRS criminal investigation (CI) agents and

analysts with the capacity to access, analyze, and

interpret data from a spectrum of sources

uploaded in a single stand-alone system. Reveal

provides users with the capability to search

multiple data sources at one time on a single set of

criteria. Those data sources are public record

databases, as well as the financial data contained

in the CBRS. Reveal can provide data

visualization by linking identifying factors such as

subjects, accounts, and identification numbers,

and provides clear representation of networks.

The Reveal system is used by investigative

analysts at CI's LDCs and within the SAR Review

Teams in each CI field office. Access to this

information must be requested through an IRS

Special Agent since there are tax return disclosure

aspects. If an IRS agent is assigned to the case and

tax charges are being pursued, a grand jury

expansion to include tax charges should be

sought.

If tax charges are not included in the

prosecution, the tax return information gained

from the investigation may not be usable in court

proceedings. An alternate method of getting and

using tax return information is by ex parte

application and order. These requests are signed

by a District Judge and forwarded to the IRS

Disclosure Office for processing. Tax returns are

useful in almost every financial investigation, and

can be used to see if the subject is reporting the

income from an illegal activity or if the subject is

using a legitimate business to launder illegally-

derived funds. If there are no plans to pursue tax

charges, it is strongly advisable to acquire any

related tax returns through the ex parte process.

In the example investigation, results from

FinCEN showed numerous cash transactions, as

well as postal money order purchases. The cashed

portion of the money orders were obtained, which

revealed where and how they had been redeemed.

The money orders had been deposited into a bank

account of an international metals broker with

offices in New York. Subpoenas were issued for

that account, which showed enormous amounts of

cash and cash equivalent being deposited, and

corresponding wires being sent all over the world.

Since the payments for alien smuggling fees from

Shah were proceeds of an SUA, they were subject

to forfeiture. The civil statute, 18 U.S.C. § 981,

was used to forfeit those proceeds.

Bank records were subpoenaed and all

relevant databases checked. The only place left

with unknown information was the subject's

residence. It is much easier to get a search warrant

for a business than a residence, but articulation for

a financial search warrant of a residence is also

relatively easy. Since financial documents are

generally stored for a long period of time,

probable cause can usually be maintained for up

to six months, as long as all circumstances

remained the same. See. e.g., United States v.

Hanton, 2006 WL 1920358 (4th Cir. July 12,

2006) (unpublished) (search warrant for

documents relating to money laundering upheld

even though events identified in the affidavit

occurred three years before the search warrant was

issued). The other advantage of a financial search

warrant is that it allows access to, and permission

to search, all areas of the property.

The information gathered was used to obtain

the search warrant of the residence. The FinCEN

hawala expert informed the investigative team that

safe deposit boxes are commonly used by

hawaladars to store gold and jewelry, which is

sometimes used for payment instead of cash.

Warrants were executed and hawala ledgers

detailing all of the subject's transactions, cash, and

cash equivalents, were found.

VI. Selecting the charges against Shah

The prosecutor knew that he planned to indict

Shah for alien smuggling, but were there other

charges to consider? Aliens were smuggled from

India to the United States and payments were

made to the smugglers. A majority of the

payments were made in the United States to Shah.

Shah then transferred the money from the

United States to India. Primarily, Shah was an

illegal money transmitter, in violation of 18

U.S.C. § 1960.

He was not licensed by the state or registered

with FinCEN and yet he transmitted money, or

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 53

acted as a bank. Shah knew the money he received

was "black" money, or proceeds of an SUA. Had

he participated in a transaction that affected

interstate commerce with more than $10,000 of

that money, he could have been charged with

money laundering in violation of 18 U.S.C.

§ 1957. However, Shah usually dealt in smaller

amounts and did not "spend" any of the money, so

he did not violate this statute.

It could be argued that Shah, by sending

money through his network, promoted the

scheme, or disguised the source and nature of the

proceeds. Shah had money in the United States

(could have been clean money) and sent money

outside the United States to promote the SUA, in

this case alien smuggling, which is a violation of

18 U.S.C. § 1956 (a)(2)(A). This statute is the

only money laundering statute that does not

require the proceeds of an SUA to have a money

laundering transaction.

Shah's purchase of postal money orders was

designed to stay under the $3,000 record keeping

requirement outlined in 31 U.S.C. § 5325. He was

also guilty of structuring to avoid the $3,000

threshold, a violation of 31 U.S.C. § 5324(a). The

reports generated by FinCEN or by the IRS

Reveal system showed, in spreadsheet format, the

postal money orders purchased by time and date.

The spreadsheet would also show other

transactions, such as deposits of cash to avoid the

$10,000 reporting requirement, or transactions of

$10,000 or more by financial institutions, wire

remitters, or businesses. Violations of both

statutes could lead to civil or criminal forfeiture.

VII. Other sources of information

The more information the prosecutor has, the

easier it is to make a decision on how to charge a

case. Additional sources of information are listed

below, and there are obviously numerous other

sources. Access to information will continue to

expand with more powerful tools, but they are no

good unless the team knows where to find them

and how to use them.

• SAR Review Teams are typically comprised

of agents from IRS, DEA, ICE, FBI, and

various other federal, state, and local law

enforcement agencies. There are

approximately eighty SAR Review Teams

throughout the United States. The teams

review all suspicious activity reports

submitted by the various financial entities

including banks, MSBs, casinos, and others

within their respective geographical areas.

The teams look for patterns and possible

violations for further investigation.

Instances where a SAR has merited further

investigation include those where an

individual or business deposited a significant

amount of cash in structured transactions. In

the case of businesses handling large sums of

cash, for example a car dealership, SAR

Review Teams also examine the transactions

to determine if the business filed Forms 8300

on the large cash transactions. Businesses are

required to file Forms 8300 if they receive

more than $10,000 in cash in a single

transaction or related transactions from an

individual sale or customer. Car and boat

dealers are the most likely candidates for this

type of requirement. Individuals with large

amounts of cash tend to buy boats and cars,

but know the sellers have to file the Forms

8300, so the buyers or sellers attempt to find

ways around the reporting requirement. The

IRS has successfully prosecuted entities

subject to Form 8300 requirements using

undercover techniques. During these

investigations, undercover agents attempt to

buy items with purported proceeds of an SUA

to see if the dealer attempts to avoid reporting

requirements. If the dealers knowingly take

proceeds of an SUA or "sting" money, the

"sting" money, the luxury item purchased, and

possibly the entire business, is subject to

forfeiture.

• The Fedwire system is a system owned and

operated by the Reserve Banks that enables

financial institutions to electronically transfer

funds between its approximately 9,000

participants. The database contains

information for the vast majority of wire

transfers over the last five years, in which at

least one party is a U.S. bank customer. These

records can be accessed through the Federal

Reserve Board.

• Investigative Data Warehouse (IDW) is an

FBI research tool that can access information

from a variety of sources, including FBI

Forms 302, bank and telephone records that

have been subpoenaed from other cases

around the country, and related analytical

products.

• The Dun and Bradstreet Internet site at

www.dnb.com, contains more than

77,000,000 global business entities.

54 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

Information available includes business

names, addresses, phone and fax numbers,

employee information, trade and assumed

names, indictments, fraud charges, other legal

events, officers and directors and their

backgrounds, bankruptcies, suits, liens and

judgments, financial information, and

corporate affiliations and linkages to other

companies.

VIII. Terrorism cases

Terrorism cases allow for the use of all of the

above mentioned techniques, including the

FinCEN 314(a) requests, which are used to access

financial institutions for accounts held in the name

of subjects of interest in money laundering and

terrorism investigations. Other sources of

information include the following.

• Airline Reporting Corporation (ARC) has

records on approximately half of all airline

ticketing done in the United States. These

records contain domestic flight and credit

information for airline ticket purchases from

U.S. travel agencies.

• The National Counterterrorism Center (NCTC

Online) is the central and shared knowledge

bank on terrorism information, and provides

source intelligence support to government-

wide counterterrorism activities by the FBI,

CIA, Departments of State, Defense, Energy,

Health and Human Services, Homeland

Security, Nuclear Regulatory Commission,

and the U.S. Capitol Hill Police.

• The FBI's Terrorism Financing Operations

Section (TFOS) can request the CIA to search

for various items, but the information has to

suggest a "nexus to terrorism." Information

need not be conclusive, but should have either

source information or relationships with other

international terrorism subjects. This

information is usually for intelligence

purposes only, and not for legal proceedings.

IX. Conclusion

As the discussion above indicates, there are

numerous sources of financial information

available to investigators. If you need further

information about any of these sources or have

any questions, contact your local IRS agent or the

Department's AFMLS at (202) 514-1263.

Note: The Organized Crime and Drug

Enforcement Task Force and AFMLS conduct

several intensive one-week Financial Investigation

seminars around the country each year for

investigators and prosecutors. For information

about these seminars, contact AFMLS.

ABOUT THE AUTHOR

Alan Hampton has been a Special Agent with

IRS Criminal Investigation since 1991 and has

worked in the New Orleans and Dallas field

offices. He has been assigned to the Joint

Terrorism Task Force in Dallas since 2001. He

has been a member of the IRS Money Laundering

Expert Witness Cadre since 2004.a

Criminal Prosecution of Banks Under

the Bank Secrecy Act

Lester Joseph

Principal Deputy Chief

Asset Forfeiture and Money Laundering

Section

Criminal Division

John Roth

Chief of the Fraud and Public Corruption

Section

U.S. Attorney's Office

District of Columbia

I. Introduction

Since it was enacted in 1970, the Bank

Secrecy Act (BSA) has provided for civil and

criminal penalties against individuals or banks

that violate its provisions. Prior to 1996, the

primary BSA requirement for financial

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 55

institutions was to file Currency Transaction

Reports (CTRs). There have been a handful of

prosecutions of financial institutions over the

years for the failure to properly file CTRs. Since

that time, however, several new statutory and

regulatory requirements were enacted that

imposed new antimoney laundering (AML)

compliance responsibilities on banks. In 1996,

Treasury Department regulations required banks

to file Suspicious Activity Reports (SARs). See 31

C.F.R. § 103.18. In 2001, the USA PATRIOT Act

required banks to establish AML programs that

included the following.

• The development of internal policies,

procedures, and controls.

• The designation of a compliance officer.

• An ongoing employee training program.

• An independent audit function to test

programs.

31 U.S.C. § 5318(h). In short, the BSA imposes a

legal obligation on banks to know their customer's

business, the source of the customer's money, and

the type of transactions that are typical for the

customer. Banks have an obligation to report, or,

in some cases, to refuse to conduct transactions

they find suspicious—ones that appear to be from

an illegitimate source, have no legitimate business

purpose, or are out of character with what they

understand their customer's business to be.

Prior to 2002, there were no criminal

enforcement actions, or even serious regulatory

penalties, for the failure of financial institutions to

file SARs or comply with the requirements of

§ 5318(h). The first civil penalty against a bank

for failing to file SARs was imposed on Great

Eastern Bank of Miami, Florida, in September

2002. Beginning in November 2002, the

Department of Justice (Department) has

conducted a series of criminal investigations into

financial institutions, resulting in either significant

criminal convictions or deferred prosecutions of

several institutions.

Some have alleged that prosecutors are

criminalizing what was designed to be a purely

regulatory matter, and that such actions impose

criminal sanctions on what is essentially a

discretionary act. While such allegations may

have some appeal in the abstract, the reality is far

different. A close examination of each of these

cases shows compelling evidence of willful

criminal conduct or a systemic failure of the

institution involved to live up to its statutory

obligations to have an effective AML program

under the BSA. This is true for each of the cases

that were brought, and there are a number of solid

legal reasons why this will continue to be true in

the future.

This article will discuss each of the criminal

enforcement actions against banks for BSA/AML

violations, the rationale for the outcome in each

case, and the role criminal prosecution of banks

and other financial institutions plays in

compliance with the BSA and the U.S. AML

program generally.

II. Broadway National Bank

In November 2002, Broadway National Bank

(Broadway), in the Southern District of New

York, was the first bank to be prosecuted for

failing to file SARs. Broadway was used by

several drug trafficking organizations to launder

drug money. The bank was also used by several

businesses with offices located within a few

blocks of the bank branch. A minimal amount of

due diligence would have disclosed that the small

businesses whose accounts were used to launder

the money could not have generated legitimate

business in the amounts of money deposited into

the accounts. After the investigation and

prosecution of the drug trafficking organizations

was completed, authorities turned their attention

to Broadway to determine why so much

laundering was going on there. Their curiosity and

persistence disclosed an institution with serious

compliance problems and only the shell of an

AML program.

Despite being provided with numerous

warnings about its legal obligations under the

BSA, by both banking regulators and its own

consultants, Broadway failed to establish and

maintain even a minimally effective AML

program. As a result, Broadway failed to report

suspicious financial transactions that occurred

over a two-year period, including hundreds of

bulk cash deposits totaling more than $46 million,

and thousands of structured deposits of more than

$76 million in cash in over 100 separate accounts.

Once these enormous, and highly suspicious,

amounts of cash were deposited, the money was

promptly wired, on the authorization of Broadway

branch managers, to bank accounts located in

Latin America and the Middle East, including

several well known money laundering havens.

56 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

For example, from January 1996 to March

1998, a money launderer named Alfred Dauber

deposited approximately $46 million in suspicious

cash deposits into nine accounts at Broadway.

Dauber opened the accounts claiming to be in the

electronics business. In fact, during this period,

Dauber participated in large-scale laundering of

narcotics proceeds on behalf of a Colombian drug

cartel. Typically, Dauber arranged for a runner to

deliver more than $150,000 in cash—once as

much as $660,645—in a single day, to a teller

window for deposit into Dauber's personal bank

accounts. These almost daily cash deposits were

brought to Broadway in duffel bags and other

containers filled with hundred of thousands of

dollars in small bills, wrapped in rubber bands.

After bringing a bag of cash to a bank teller, the

runner typically left the bank while the cash was

being counted, and picked up the emptied bag on

his next visit, often the next day, when he

delivered another bag containing tens of

thousands of dollars for deposit.

There was so much cash brought to the bank

for deposit on behalf of Dauber that the tellers

often had to count all the cash during their lunch

hour. They complained to senior bank officers

about the time it took to count these enormous

cash deposits. Often, the dollar amounts reflected

on the deposit slips left in the duffel bag did not

match the amount of cash in the duffel bag to be

deposited into Dauber's accounts. Eventually,

Dauber arranged for the tellers to complete the

deposit slips. On the day of a deposit, or within a

few days of a deposit, senior bank officers signed

forms, at the direction of Dauber, authorizing the

wiring of a significant portion of this recently-

deposited cash to bank accounts in Colombia,

Panama, and Miami, Florida. Broadway

employees were directly involved in all the

Dauber transactions, yet never made any inquiry

to determine if there were business reasons for

this suspicious activity. They also failed to file

Criminal Referrral Forms (the predecessor to the

SAR) or SARs for any of these transactions.

As a result of its criminal conduct, according

to the Government's Sentencing Memorandum,

Broadway became a bank of choice for narcotics

money launderers and other individuals who

wished to shield their financial activities from the

government. Several narcotics money launderers

who banked at Broadway informed the

government that they chose to launder their illegal

narcotics proceeds there on the recommendation

of other launderers and because Broadway

personnel rarely asked questions. Broadway pled

guilty to a three-count Information alleging the

failure to file SARs, the failure to file accurate

CTRs, and the failure to have an effective AML

compliance program. The guilty plea resulted in a

$4 million fine. United States v. Broadway

National Bank, No. 02 Cr.1507 (TPG) (S.D.N.Y.

Nov. 27, 2002).

III. Banco Popular

Banco Popular de Puerto Rico (BPPR), one of

the thirty-six largest financial institutions in the

United States and the largest financial institution

in Puerto Rico, was the first bank to enter into a

Deferred Prosecution Agreement (DPA) for

failing to file SARs, in January 2003. The bank

provides complete financial services in Puerto

Rico, the continental United States, and the

Caribbean. As in the Broadway National Bank

case, law enforcement attention focused on BPPR

as a result of the investigation of several drug

trafficking organizations and money laundering

schemes.

First, Ferrario Pozzi used an account at BPPR

to launder approximately $32 million of narcotics

proceeds. Suspicious activity that went unreported

by the bank included huge cash deposits (at times

over $500,000 a day) that consumed hours of

tellers' time to process. An investigation by the

Internal Revenue Service (IRS) and the Customs

Service (now Immigration and Customs

Enforcement) revealed that false CTRs were filed

and no SAR was filed until February 1998, after

approximately $21 million of narcotics proceeds

was laundered through the account at one branch.

The investigation revealed that the $32

million deposited into the Ferrario account

consisted of cash from numerous drug trafficking

organizations. Large cash deposits, made up of

small denominations, numbering as many as

fifteen in the course of a day, were made on a

regular basis into the Ferrario account. In June

1997, the operations of the Old San Juan branch

were disrupted as a result of the time it took to

count Ferrario's cash. At one point, employees of

the bank told Ferrario to make his deposits

through the night depository to avoid tying up the

teller lines. Ferrario's cash deposits required

significantly more armored car pickups to transfer

the money. The need for the additional trips was

reported to the regional manager and the

operations officer to justify the extra expense.

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 57

In October 1995, the branch manager at the

Old San Juan Branch was informed by an

employee that Ferrario's transactions were

significant and suspicious. As early as May 1997,

memoranda were sent from the Old San Juan

Branch to the San Juan Regional Manager

concerning the increased daily, branch cash-levels

caused by Ferrario's deposits.

From June 1995 to March 1998, hundreds of

wire transfers were made from the Ferrario

account to over 300 locations around the world.

The wire transfers occurred almost immediately

after the deposits. Often, Ferrario would fax his

wire instructions to BPPR from his base of

operations in Colombia. Wire transfers numbered

between forty to eighty a month and amounted to

approximately 25 percent of the branch's daily

wire activity. The wire transfers were inconsistent

with Ferrario's purported business and consistent

with the laundering of drug proceeds.

Between July 1995 and March 1998, BPPR

filed 416 CTRs reporting Ferrario's cash

transactions. Three hundred eighty four of these

stated that the funds were derived from a gas

station. In a single week in 1995, the same branch

employee filed three CTRs listing three different

sources of funds—overseas calls, a gas station,

and money transfers— as the source of the cash

deposits. BPPR's ability to catch this discrepancy

was hampered by a lack of staffing in its money

laundering compliance program.

Ferrario's business was located only two

blocks from the Old San Juan Branch. Many of

the branch employees walked by the business

every day, and not only were they aware that the

business was not a gas station, but they also rarely

saw customers at the business. Tellers at the Old

San Juan Branch felt that Ferrario's deposits were

suspicious, and frequent comments were made

among branch personnel that the money deposited

by Ferrario was from illegal sources and that

Ferrario was using his account to launder money.

In one instance, after an argument with a teller

who refused to exchange $100 bills for $20 bills,

Ferarrio asked to speak to a branch manager, who

then instructed the teller to find as many $100

bills as possible. Concerns about the huge volume

of cash deposits and the disruption it caused at the

branch were discussed at monthly branch

meetings.

Despite two years of suspicious activity in the

Ferrario account, the service of a subpoena on the

account in August 1997, and hundreds of high-

risk transactions, the bank failed to investigate

Ferrario or his business until December 1997.

BPPR failed to file a SAR on the Ferrario account

activity until March 19, 1998, two and one-half

years after the account was opened and after over

$20 million of narcotics proceeds had been

laundered through the account. The SAR

understated the actual amount of cash deposited

and the time period of the deposits, and

incorrectly reported the name of the Ferrario

account as "Puerto Rico Net Yellow." The

reported account was an additional account

maintained by Ferrario at BPPR, but it was not the

account into which the cash deposits were made

or from which the wire transfers were made. The

SAR was virtually of no use to law enforcement.

In April 1998, the Ferrario SAR was presented to

the Auditing Committee of the Board of Directors

of BPPR. Although this was by far the largest

SAR ever presented to the Board of Directors in

terms of suspected dollar amount, they took no

action and asked no questions.

The second scenario involved an IRS

investigation targeting Jairo de Jesus Vallejo-

Jurado (Vallejo). This investigation revealed that,

from late 1998 through 2000 (post-Ferrario),

Vallejo used two accounts at BPPR to launder

nearly $2 million of narcotics proceeds by

structuring cash deposits. While the bank's Large

Cash Reporting System did pick up and aggregate

structured transactions and file CTRs, BPPR

failed to file SARs on the activity of Vallejo's

accounts until November 1999, at least one year

after the account activity changed dramatically.

Over $1 million of narcotics proceeds had been

laundered through the accounts, and three law

enforcement subpoenas had been served. BPPR

understated the dollar amounts for both accounts

involved in the suspicious activity. Subsequent to

the filing of the initial SARs, BPPR conducted its

first "Know Your Customer" (KYC) visit to

Vallejo. Following this visit, supplemental SARs

were filed in December 1999, noting that the

account activity reported on the SARs filed in

November was inconsistent with the nature of

Vallejo's purported business.

BPPR continued to permit Vallejo to structure

deposits into 2000, even after branch managers

reported that there was no justification for the

deposit of cash into the accounts. Bank

documentation reflects that in December 1999,

BPPR contemplated closing the accounts, but

decided against it. Shortly thereafter, in February

58 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

2000, the IRS asked the bank to keep the account

open to facilitate the investigation of Vallejo.

Finally, from 1997 through June 2000, BPPR,

through its International Banking Entity (IBE),

provided banking services to foreign businesses in

the Dominican Republic purportedly operating as

money service businesses (MSBs). In 1997, MSBs

were considered high-risk businesses for money

laundering, and the Dominican Republic was

considered to be a high-risk geographic area for

narcotics-related money laundering.

Although BPPR knew the general purpose of

the businesses in question, the bank failed to

document adequately the basis for this knowledge.

For example, BPPR failed to document whether

any customer visits were made to these businesses

prior to 1999, and the customer files relating to

these accounts contained inadequate

documentation as to the nature of the client's

business. Although BPPR conducted KYC visits

in 1999, the visitation documentation contains no

information about the expected volume and type

of account activity for the purported business.

From at least as early as 1997, BPPR received

these businesses' checks and other items in bulk

for purposes of processing, and processed the

items without reviewing them. There was activity

through certain of these accounts which was

indicative of money laundering by the businesses

or their customers, yet no SARs were filed.

In one case, BPPR failed to investigate and

allowed transactions to continue even after being

put on notice by law enforcement that the account

might have involved criminal activity.

Specifically, BPPR was served with a Drug

Enforcement Administration seizure warrant

relating to an account opened at BPPR that had

received $275,000 from Comercial Importadora

SMA, a Dominican Republic business that had

also opened an account at the bank. Although the

branch manager informed the account holder of

Comercial Importadora that his account had to be

closed, after consultation with the account holder

and his lawyer, the branch manager allowed the

account holder's brother to open an account on the

same day the seizure warrant was received, and

the account opening documentation noted that the

account was a substitute for the Comercial

Importadora SMA account.

In January 2003, BPPR entered into a DPA

with the Department, based on its failure to detect

and report money laundering activity through the

bank. Per the terms of the Agreement, a one-count

Information was filed charging the bank with

failure to file SARs. The Information, however,

would be dismissed if the bank fully complied

with its obligations under the Agreement to

develop and maintain an effective AML

compliance program. The Information was

subsequently dismissed after the one-year period.

In addition, BPPR agreed to forfeit $21.6 million.

Financial Crimes Enforcement Network (FinCEN)

assessed a $20 million civil penalty against the

bank, but this was deemed satisfied by the

payment of the $21.6 million forfeiture.

United States v. Banco Popular De Puerto Rico,

No. Cr 03-317 (PG)(D.P.R. Jan. 16, 2003).

The decision to pursue a criminal prosecution

of BPPR was based on the bank's repeated failures

to file SARs or to take remedial action when faced

with a massive and extended inflow of cash that

had every earmark of being drug proceeds. The

nature of these transactions became public

through the prosecution of Ferrario on federal

money laundering charges, after BPPR allowed

this cash to flow through its bank. These events

led to some efforts at reform. Shortly after the

prosecution of Ferrario, BPPR still accepted the

structured Vallejo deposits, and even recognized

the structuring, while failing to take any timely

action. Ferrario and Vallejo were convicted of

money laundering, and sentenced to 97 months

and 27 months, respectively. Even as the

investigation of the bank proceeded, BPPR

serviced the high-risk Dominican MSB accounts.

However, in light of the remedial actions taken by

the bank, its cooperation with the government's

investigation, and its willingness to acknowledge

responsibility for its actions, the government

agreed to enter into a DPA instead of pursuing a

criminal conviction.

IV. Delta National Bank

In October 2003, Delta Bank, a Miami-based

investment bank that was owned by a Brazilian

national, was the third bank to be the subject of a

criminal enforcement action for the failure to file

SARs. Delta Bank came to the attention of agents

and prosecutors in the District of Maryland during

the course of an undercover operation entitled

"Operation Laundry Chute." The vast majority of

the bank's customers were Brazilian or

Colombian. A Colombian national, who operated

an independent foreign currency exchange

business in Colombia, opened three accounts at

Delta Bank in 1998. The purpose of foreign

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 59

exchange businesses, such as that operated by the

customer, was to act as a broker between

customers who had United States dollars and

wished to purchase Colombian pesos, or vice

versa. Foreign currency exchange businesses in

Colombia had been identified by the bank's

regulator, the Office of the Comptroller of the

Currency (OCC), and other federal agencies, as

high-risk for money laundering the proceeds of

narcotics trafficking and other criminal activity.

During this period, the bank and its officers were

aware of these risks, and that the customer was

operating such a business.

During the period of time covered in the

Information, the customer assisted other

Colombian customers of the bank with

transactions that were conducted as part of the

foreign currency exchange business. The bank

was aware of this assistance. The total amount

involved in the customers' foreign currency

exchange transactions was between $5 million and

$10 million. The bank acknowledged that a SAR

was required to be filed concerning the customer's

use of the account for foreign currency exchange

business, but the bank incorrectly concluded that

no SAR was required, and thus willfully failed to

file.

Delta Bank is an unusual case in that it

involved the failure to file a SAR in transactions

involving a single customer. This was not a failure

of the bank's compliance program, but rather an

intentional decision by the bank to allow these

type transactions. Bank officers were aware of the

possibility that the customer might be engaging in

Black Market Peso Exchange (BMPE)

transactions (a trade-based money laundering

system through which South American money

brokers facilitate a nonregulated currency

exchange of United States dollars for local South

American currency) and chose not to report the

transactions as suspicious. As a result of the

bank's awareness of the suspicious transactions,

its failure to report them, and the fact that drug

money in fact moved through the bank, the

decision was made to pursue a criminal charge.

In October 2003, Delta Bank pled guilty in the

District of Maryland to a one-count Information

charging the bank with the failure to file a SAR on

one of the transactions through the customer's

account. The bank also agreed to the

administrative forfeiture of $950,000. United

States v. Delta National Bank and Trust

Company, Criminal No. JFM-03-0416 (D. Md.

Oct. 1, 2003).

V. AmSouth

AmSouth Bank (AmSouth) was the second

institution to enter into a DPA for failing to file

SARs. This was the first case involving white

collar crime, rather than drug trafficking. In

contrast to the previous cases, however, AmSouth

attracted special scrutiny from the prosecutors

because of its slow and incomplete response to

grand jury subpoenas.

In the spring of 2002, the United States

Attorney's Office for the Southern District of

Mississippi, along with a number of federal and

state agencies, began an investigation of a

fraudulent promissory note scheme. The scheme

was perpetrated by Louis D. Hamric, II, a licensed

attorney; Victor G. Nance, a registered investment

adviser employed by MONY; and various other

individuals. Hamric issued the investors a

promissory note assuring them of a very high

interest rate for one year. Hamric had little, if any,

contact with the actual investors. Various

promoters of the scheme, including Nance,

brought investors to Hamric and received a

commission for their services. Hamric told Nance

that he needed a "block" of $10 million to

participate in a "trading program" that would

provide returns through the promissory notes of

up to 25 percent annually. Nance convinced over

forty of his clients to invest in Hamric's program

by making numerous misrepresentations to them

about the nature and risk of the investment.

During the two year course of the "Ponzi"

scheme, AmSouth officers and employees, at

seven branches in four states, had contacts with

Nance or Hamric that should have alerted the

bank to the criminal activity. One of these

employees suspected involvement in an illegal

"Ponzi" scheme and reported concerns to

AmSouth's Legal Department and Corporate

Security. AmSouth provided a copy of each

custodial account holder's bank statement to

Hamric and Nance on a quarterly basis, without

the knowledge or consent of the custodial account

holders. Further, when the customer chose to

reinvest, AmSouth agreed, without the knowledge

of any of the account holders, to offset the

proceeds of the old note against the new one, and

send Hamric the difference.

Beginning in early 2001, several different

promoters brought a second wave of investors into

60 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

the Hamric scheme. AmSouth held promissory

notes assuring these new investors as much as 25

percent interest monthly. Although a note

promising such interest is suspicious on its face,

AmSouth did not question the terms or nature of

any of these promissory notes. Hamric and Nance

attracted a total of approximately $20 million in

fraud proceeds, caused the proceeds to be

deposited into AmSouth accounts, and transferred

the proceeds among, and out of those accounts.

They would not have succeeded in their schemes

without AmSouth's participation.

At some point, Hamric stopped paying

interest owed to the investors, and the fraudulent

promissory note scheme fell apart. This triggered

a number of civil lawsuits against individuals

(Hamric, Nance, and others) and institutions,

including AmSouth. The scheme also became the

subject of several investigations by state and

federal authorities, including a federal grand jury

investigation in the Southern District of

Mississippi.

Between April 2002 and June 2003, eight

federal grand jury subpoenas were issued to

AmSouth requesting the following information.

• All documents relating to the Hamric and

Nance promissory note scheme, including all

documents for any custodial trust accounts

opened by either Hamric or Nance on behalf

of an account holder.

• All documents for any bank accounts held by

Hamric or Nance and various others

associated with the scheme.

• All internal and external communications

between any AmSouth employee and Hamric,

Nance, or any custodial trust account holder.

In responding to the grand jury subpoenas,

AmSouth (1) failed to timely produce certain

documents called for by the subpoenas; (2) failed

to produce certain documents in the manner in

which they were kept in the regular course of

business, as required by the subpoenas; and (3)

failed to locate and produce certain documents

called for by the subpoenas until AmSouth was

targeted in this criminal investigation.

After being notified of concerns by AmSouth

employees, AmSouth's Legal and Corporate

Security Departments, in conjunction with

AmSouth's management, had a legal obligation to

report that Hamric might be operating an illegal

scheme. AmSouth did not file a SAR on the

accounts used by Nance and Hamric until nearly

two years after the date that the suspicious activity

should have been detected, and several months

after AmSouth learned that law enforcement was

investigating Hamric. By characterizing the

suspicious activity as check fraud and

understating the amount involved, the SAR failed

to fully and accurately describe the criminal

activities of Hamric. AmSouth's Legal

Department, including its then-General Counsel,

had reviewed the Hamric SAR after it was filed

and found it sufficient.

While the Hamric activity was the

predominant basis for the AmSouth prosecution,

prosecutors pointed to several other instances

where AmSouth should have filed SARs, but

failed to do so. The failure to file SARs was

indicative of serious deficiencies in AmSouth's

AML program. In October 2004, AmSouth

entered into a DPA and agreed to forfeit $40

million. The Information that was filed, charging

one count of failing to file SARs, was dismissed

in October 2005 pursuant to the DPA v. AmSouth

Bancorporation and AmSouth Bank, No. 3:04-cr-

167LSu (S.D. Miss. Oct. 12, 2004).

VI. Riggs Bank

Riggs Bank (Riggs) was convicted, pursuant

to a guilty plea, of criminal violations of the BSA

and ordered to pay a $16 million criminal fine, in

addition to the $25 million civil penalty that had

been previously imposed by FinCEN and the

banking regulators. Riggs came to the attention of

prosecutors in 2003 as a result of an investigation

conducted by the Senate Permanent

Subcommittee on Investigations into international

political corruption and money laundering. The

prosecutors found that Riggs failed to engage in

even the most cursory due diligence review of

accounts held by two particular

customers—accounts known as "Politically

Exposed Persons"—that Riggs knew posed a high

risk of money laundering. Riggs allowed the

accounts to be used to transfer large sums of

money in a highly suspicious manner and failed to

report such transactions to the proper authorities,

as required by law. Moreover, the bank was aware

of numerous obviously suspicious

transactions—and in some cases executives at the

bank even affirmatively assisted in conducting

those transactions—yet failed to report them.

Riggs' failures involved, for the most part,

banking relationships with Augusto Pinochet, the

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 61

former Chilean dictator, and the ruling family of

Equatorial Guinea.

A. Pinochet accounts

Augusto Pinochet was the de facto leader or

president of Chile from 1973 to 1990, the

Commander-in-Chief of its armed forces, and

sitting senator from 1990 to 1998. His rule was

marked by allegations of significant human rights

abuses and political corruption. In 1998, a Spanish

magistrate issued an arrest warrant for Pinochet

for crimes of genocide, terrorism, and torture, and

issued a restraining order against all his assets. In

November 1998, newspapers reported that U.S.

authorities were discussing whether to seek the

extradition of Pinochet in connection with the

murder of two of his political opponents, by the

Chilean secret police, in Washington, D.C. On

January 29, 2001, Pinochet was placed under

house arrest in Chile. By May of 2001, Pinochet's

assets, held in various offshore accounts and

investment vehicles, were being seized or frozen.

From 1985 to 2002, Pinochet and his wife,

Lucia Hiriart Rodriguez, maintained multiple

bank accounts, investments, and certificates of

deposit at Riggs (collectively, the "Pinochet

Accounts"). The Pinochet Accounts were located

at Riggs in the United States and Riggs Bank

Europe, Ltd., London, United Kingdom.

Additionally, in 1996 and 1998, Riggs assisted

Pinochet in the establishment of two offshore

shell corporations in the Bahamas—Ashburton

Company Ltd. and Althorp Investment Co., Ltd.

Both were listed as nominal owners of bank

accounts and certificates of deposit maintained by

Pinochet.

During this time period, Pinochet deposited

more than $10 million into his accounts at Riggs.

Little due diligence was conducted on the source

of Pinochet's wealth, and no attempt was made to

reconcile his stated wealth with the subsequent

deposits. Riggs employees and officers avoided

using Pinochet's last name, even in routine

internal communications, referring to him as "our

prominent client in Chile," "the Washington

client," or other aliases, including his wife's

maiden name or his maternal family name.

Over the course of the history of the Pinochet

Accounts, a number of suspect transactions were

conducted by, or directed by, Pinochet. Riggs

employees structured financial transactions in

order to avoid the scrutiny of law enforcement and

others who would seek to discover Pinochet's

wealth. These transactions were highly unusual,

suspicious, and appeared to be structured in a way

to prevent their discovery by the OCC, law

enforcement authorities, or others who may have

been attempting to attach Pinochet's assets. Riggs

Bank failed to conduct sufficient due diligence as

to the source of the funds and failed to report any

transactions that it knew, or had reason to know,

were suspicious.

B. Equatorial Guinea

Equatorial Guinea (EG) is a country on the

west coast of Africa that is approximately the size

of Maryland. In 1995, billions of dollars of oil

reserves were discovered within EG territorial

waters, resulting in a significant influx of capital.

Its President, Teodoro Obiang Nguema, came to

power in 1979 in a military coup. His reelections

in February 1996 and December 2002 were

largely viewed by the United States government

and international observers as tainted by fraud and

intimidation. Public corruption had long been

considered a significant problem in his

government.

From 1996 to 2004, Riggs maintained

numerous accounts for EG. Over the course of

this period, Riggs opened over sixty-two accounts

and certificates of deposit for the EG Government,

numerous senior government officials, and their

family members. Riggs opened multiple personal

accounts for the President and his relatives and

assisted in establishing offshore shell corporations

for the President and his sons (known collectively

as the EG Accounts). By 2003, the accounts had

become Riggs's largest single relationship, with

balances and outstanding loans that totaled nearly

$700 million.

In September 1999, Riggs assisted the EG

President in the establishment of Otong S.A., an

offshore shell corporation, incorporated in the

Bahamas. The Bahamas was a bank secrecy

jurisdiction at the time of incorporation and held a

money market account for the corporation. Over

the course of the history of the EG Accounts, the

following transactions took place through an

account in the name of Otong S.A (the Otong

Account).

• April 20, 2000: $1 million deposit of U.S.

currency.

• March 8, 2001: $1.5 million deposit of U.S.

currency.

62 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

• April 20, 2001: $1 million deposit of U.S.

currency.

• September 5, 2001: $2 million deposit of U.S.

currency.

Riggs failed to determine the background and

possible purpose of these highly suspicious

transactions. The bank also failed to file a SAR

until after the OCC and Congressional

investigators brought the transactions to the bank's

attention. These transactions were suspicious

because of the cash nature of the deposits, the lack

of understanding as to the source or destination of

the money, and the transactions were not the sort

in which the particular customer would normally

be expected to engage.

From April 2000 to April 2002, Riggs filed

false CTRs on cash deposits that totaled $11.5

million made into one of the EG Accounts. These

CTRs listed the Otong Account as an exporter of

timber, rather than an offshore corporation

controlled by the EG President. Certain Riggs

employees knew this representation to be

inaccurate.

In January 2005, Riggs pleaded guilty to

failing to file an SAR in violation of 31 U.S.C.

§ 5318 and agreed to a fine of $16 million. Riggs

was purchased by PNC Bank in May 2005, ending

more than 160 years of Riggs' history in the

District of Columbia. United States v. Riggs Bank,

NA, No. Cr-05-35 (RMU) (D.D.C. Jan. 27, 2005).

VII. Bank of New York

In November 2005, the Bank of New York

(BNY) entered into a nonprosecution agreement

with the United States to resolve two separate

investigations that were conducted in the Eastern

and Southern Districts of New York. BNY

admitted its criminal conduct and agreed to forfeit

$26 million to the United States and pay $12

million in restitution to its victims. The bank also

agreed to make sweeping internal reforms to

ensure compliance with its antifraud and money

laundering obligations, and be monitored by an

independent examiner. BNY will not be

prosecuted for the unlawful practices of its

officers and employees for the following reasons.

• BNY's acceptance of responsibility.

• Its cooperation in the investigations.

• Its willingness to make restitution and take

significant remedial action.

The bank must fully comply with the terms of its

cooperation agreement with the government for a

period of three years.

A. The Southern District of New York

investigation

The investigation uncovered a scheme

involving the unlicensed transmission of billions

of dollars, originating in Russia, through BNY

accounts in the United States, to third-party

transferees. The investigation focused on

misconduct related to the 1996 opening of

accounts at a retail branch of BNY in the names of

Benex International Co., Inc. (Benex) and BECS

International LLC (BECS). These accounts were

opened by Peter Berlin, a Russian émigré, with

the assistance of his wife, Lucy Edwards, also a

Russian émigré, who was a BNY vice president.

During the next three and one-half years,

approximately $7 billion flowed through the

Benex and BECS accounts to third-party

transferees around the world.

The Benex and BECS accounts were part of

an underground money transfer business that was

operated by a bank located in Moscow and a

company located in Queens, New York. From an

office in Queens, company employees executed

hundreds of wire transfers each day from the

Benex and BECS accounts, using electronic

banking software provided by BNY. The

instructions were provided by the Moscow bank.

Despite the obvious money laundering risks

associated with such an operation, BNY failed to

conduct adequate due diligence or make "KYC"

inquiries with regard to Berlin or the Benex and

BECS accounts. Some executives in the Retail

Banking Division believed, incorrectly, that

Berlin was in the import/export business, but no

employee ever sought to verify that belief. Other

executives in the Cash Management Division

correctly understood that Benex and BECS

essentially acted as payment brokers or money

transmitters, whose businesses consisted solely of

transferring funds on behalf of other parties.

Those executives, however, did not make any

inquiry as to whether Benex and BECS were

properly licensed as money transmitters.

BNY also failed to adequately monitor the

activity in the Benex and BECS accounts, which

were the highest fee-producing accounts in the

One Wall Street Branch. On the two occasions

that Cash Management Division employees

sought to conduct a money laundering review of

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 63

Benex and BECS accounts, they were advised by

the Funds Transfer Division that BNY did not

have an automated system for reviewing account

activity. The manager further advised that it

would be impractical to conduct a manual review

of the accounts, given the tremendous volume of

activity. A number of highly suspicious

circumstances that should have raised flags about

money laundering went undetected because of the

failure to monitor the activity in these accounts.

In February 2000, Berlin and Edwards pled

guilty to, among other crimes, conspiring to

conduct unauthorized and unregulated banking

activities, operate an illegal money transmitting

business, and launder money to promote wire

fraud. Berlin and Edwards acknowledged that the

illegal banking network of which the Benex and

BECS accounts were a part, was designed, in part,

to allow Russian individuals and businesses to

wire transfer funds in and out of Russia in

violation of Russian currency controls, and

thereby to defraud the Russian government of

customs duties and tax revenues. United States v.

Peter Berlin and Lucy Edwards, No. S1 99 Cr.

914 (SWK) (S.D.N.Y. Feb. 16, 2000).

B. The Eastern District of New York

investigation

This investigation uncovered a scheme

involving the submission of fraudulent loan

applications, by a commercial customer, that were

supported by sham escrow agreements executed

by a corrupt BNY branch manager. This scheme

resulted in millions of dollars in losses to victim

banks throughout the United States. To date, at

least nine individuals, including a former BNY

vice president and a former BNY branch manager,

have been convicted. The investigation disclosed

that, from approximately 1991 to 2002, BNY

branch managers and employees working at a

retail branch in Island Park, New York, executed

unauthorized and materially false and misleading

escrow agreements for a BNY commercial

customer, RW Professional Leasing Services

Corp. (PLS). PLS was engaged in the business of

arranging financing for medical providers,

ostensibly for the leasing of medical equipment.

Although the escrow agreements obligated BNY

to act as an escrow agent for other banks that were

financing the medical equipment leases, the bank

deliberately failed to establish any escrow

accounts or perform any terms of the escrow

agreements. The financing banks relied on the

escrow agreements in approving loan requests

totaling tens of millions of dollars.

The scheme proceeded undetected for more

than a decade and continued during the period that

BNY was bound by the enhanced due diligence

and reporting requirements of an agreement with

federal and state banking regulators signed in

February 2000. In early 2002, BNY executives

learned of the illegal conduct at the Island Park

branch. BNY's general counsel and managing

counsel continued to ignore the bank's reporting

obligations under the BSA and intentionally failed

to take steps to file a SAR and notify law

enforcement authorities in a timely manner.

In admitting responsibility, BNY

acknowledged the following, among other things.

• It failed to have an effective AML program.

• It intentionally failed to take steps to report

known evidence of suspected criminal

conduct by a bank customer and BNY

employees, as required under the mandatory

reporting obligations of the BSA, even after

that evidence came to the attention of senior

BNY executives.

• The bank's general counsel, managing

counsel, and other senior executives,

repeatedly ignored the bank's legal obligations

to file the required SARs.

• It filed SARs only after the principals of a

BNY customer were arrested months later by

federal authorities.

The SAR that was ultimately filed was both

inaccurate and incomplete. It failed to make any

reference to the misconduct of BNY personnel

relating to the escrow agreements, or how the

escrow agreements were used to defraud other

banks. During this period, BNY was already

under compulsion to correct problems in its AML

program as a result of the Southern District of

New York investigation, pursuant to an agreement

between BNY, the Federal Reserve Bank of New

York, and the New York State Banking

Department. The agreement placed the bank under

heightened regulatory scrutiny and required

enhanced due diligence and suspicious activity

reporting procedures by the bank. BNY's failures

allowed the fraudulent activities to continue,

resulting in at least $18 million in losses to

victims.

64 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

VIII. BankAtlantic

In April 2006, Florida-based BankAtlantic

entered into a DPA with the government and

agreed to forfeit $10 million to resolve charges of

failing to maintain an AML program.

Concurrently, the Office of Thrift Supervision

(OTS) and FinCEN each assessed a $10 million

civil penalty against BankAtlantic for violations

of the BSA, which was deemed satisfied by the

payment of the $10 million forfeiture.

The charge filed against BankAtlantic arose

out of transactions conducted by and through

BankAtlantic between July 1997 and April 2004.

During this time, more than $50 million in

suspicious transactions were conducted through

certain accounts, including transactions involving

more than $10 million of identified drug proceeds.

BankAtlantic failed to detect, identify, and report

the suspicious transactions, as required by the

BSA.

An undercover operation by the Drug

Enforcement Administration into the laundering

of drug proceeds found that $7 million of

suspected drug money was being wire transferred

to accounts at BankAtlantic. Further investigation

led to the discovery of other accounts that were

suspected of being used to launder drug money.

These were accounts that either had received

suspected drug proceeds or were related to those

accounts or other accounts managed by the

suspect who was the account manager.

These targeted accounts included the

following characteristics which should have raised

red flags at BankAtlantic.

• Accounts controlled by nonresident aliens, but

held in the name of offshore shell

corporations, particularly "bearer share"

corporations, which are easily incorporated in

such jurisdictions as the British Virgin

Islands.

• Accounts controlled by domestic businesses

that sell or export goods to South American

customers, but generally receive payment

from United States sources.

• Foreign MSBs that were determined to be

unlicensed.

• Individual accounts held by nonresident aliens

and U.S. residents being used to transmit

funds for unrelated persons. These accounts

are easily identified by numerous unrelated

sources of incoming and outgoing transfers by

check and wire.

• Licensed foreign MSBs that are operating by

and through offshore shell corporations.

The targeted accounts were characterized by

two types of activity that should have been readily

identified as suspicious and reported by

BankAtlantic.

• Most of the accounts showed a high volume

of incoming and outgoing wire transfers from

various domestic and international accounts

held in the names of unrelated individuals and

corporations.

• The accounts showed a high volume of check

structuring activity.

Although the account manager personally

handled most of the suspicious transactions,

including the receipt of hundreds of pouch

deposits containing sequential and structured

checks, the account manager failed to take any

action to report the suspicious activity, as required

by the BSA.

The account manager not only failed to report

the suspicious activity in the targeted accounts,

but also concealed facts from bank management.

The bank failed to maintain the required and

necessary procedures and systems to

independently identify and report suspicious

activity. Serious and systemic AML and BSA

compliance failures continued uncorrected at

BankAtlantic for several years, some of which had

previously come to the attention of law

enforcement. Consequently, BankAtlantic

admitted that it did not identify and report the

suspicious activity occurring in these accounts, as

required by the BSA. United States v.

BankAtlantic, NO. 06-60126-CR-COHN (S.D.

Fla. Apr. 26, 2006).

IX. American Express Bank

International

In August 2007, American Express Bank

International (AEBI), an Edge Act corporation

headquartered in Miami, Florida, entered into a

DPA with the Department and agreed to forfeit

$55 million to resolve charges of failing to

maintain an effective AML program. FinCEN

assessed a $25 million civil money penalty and

the Federal Reserve assessed a $2 million penalty

(but the Federal Reserve penalty and $15 million

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 65

of the FinCEN penalty were deemed satisfied by

the Department forfeiture).

The charge filed against AEBI arose from the

same DEA investigation that resulted in the DPA

against BankAtlantic. During this investigation,

which took place between December 1999 and

April 2004, investigators identified specific

accounts (targeted accounts) at AEBI that they

believed were used to launder more than $55

million of drug proceeds through the BMPE, a

trade-based money laundering system through

which South American money brokers facilitate a

nonregulated currency exchange of United States

dollars for local South American currency. The

investigation disclosed that AEBI knowingly

allowed South American customers to use

accounts at the bank to process parallel currency

exchange market transactions, many of which

turned out to be BMPE transactions. These

accounts were characterized by many suspicious

incoming funds (typically wire transfers) from

persons and entities completely unrelated to the

account holder. In many cases, the financial

transactions were inconsistent with the nature of

the account holder's business, as understood by

bank personnel. A large amount of funds was

deposited into the accounts under circumstances

suggesting that they were drug proceeds. In

addition, hundreds of thousands of dollars of drug

proceeds were transferred to these accounts

directly from law enforcement agents, who in an

undercover capacity, were "working for"

Colombian money brokers and drug traffickers.

AEBI's particular risk to money laundering

through parallel currency exchange transactions

and the BMPE was heightened (1) because many

of its clients were high net-worth residents in high

risk countries in Latin America, such as

Colombia, who often derived their wealth from

commercial activities; (2) due to its character as

an Edge Act bank engaged in providing private

banking services to nonresident aliens; and (3) as

a private bank. As early as November 1999,

private banking was identified as a high-risk area

in the fight against money laundering.

AEBI's compliance personnel were well

aware of the prevalent use of the BMPE by

Colombian businessmen and the nature of

transactions which may be associated with the

BMPE. Bank personnel demonstrated

sophisticated knowledge and understanding of

parallel currency exchange markets, in particular

the BMPE. High-level bank officers were aware

that South American parallel currency exchange

markets had evolved into a system used to launder

illicit proceeds and to bypass the government as

the primary source of dollars to launder.

Relationship Managers (RM) knew that it was

common knowledge in South America,

particularly Colombia, that the parallel exchange

markets were funded, at least in part, with drug

money and that there were two main reasons to

use the parallel markets: 1) tax avoidance; and 2)

a better exchange rate. At the same time, these

AEBI RM's and supervisors considered the

parallel exchange market a "fact of life" in South

America—not something to be prevented or

reported—but something that any financial

institution providing banking services to wealthy

South Americans would have to accommodate in

the ordinary course of business.

The investigation of AEBI's compliance

program determined that the primary cause of

AEBI's failure to identify, prevent, and report this

activity was that AEBI's AML program contained

serious and systemic deficiencies in critical areas,

as outlined below, which were uncovered during

the investigation.

• AEBI failed to exercise sufficient control over

accounts held in the names of offshore bearer

share corporations, and until 2004 had no

policy or procedure requiring beneficial

owners of such accounts to certify in writing

their continued ownership of the bearer

shares.

• AEBI failed to conduct a risk assessment of

its operations until 2002, and consequently

was unable to, and did not, identify and

monitor its highest-risk banking products and

transactions.

• AEBI failed to develop and maintain an

account monitoring program that was

adequately designed to identify, detect, report,

and prevent suspicious activities.

• AEBI failed to monitor adequately the source

of funds sent to customer accounts to identify

suspicious activities.

• AEBI failed to independently verify

information on clients provided by private

bank RMs.

• AEBI failed to provide compliance personnel

with authority to identify and prevent

suspicious and high-risk banking activities.

66 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

• AEBI failed to maintain an audit program

reasonably designed to ensure the bank's

compliance with BSA/AML laws and

regulations.

A. Know your customer deficiencies

Almost all of the targeted accounts of AEBI

shared the characteristic of being held in the

names of "bearer share corporations" incorporated

in offshore jurisdictions, such as the British Virgin

Islands (BVI). Bearer share corporations are

owned by the person or entity holding, or

"bearing," the unregistered corporate common

stock. There are no formal procedures for

transferring ownership of a bearer share

corporation's stock certificates, and linking any

person to such a corporation is difficult.

Accordingly, professional money launderers and

other criminals frequently use such corporations

to open offshore and domestic bank accounts to

deposit illicit money. Bearer share structures make

it extremely difficult for banks (and law

enforcement) to determine the actual owners of

accounts and to satisfy the KYC requirements.

One example among the targeted accounts at

AEBI was an account controlled by a Colombian

national, but held in the name of an offshore

(BVI) bearer share corporation. This corporation

was controlled by three other bearer share

corporations, which had given the Colombian

national a power of attorney, authorizing him to

control the financial affairs and bank accounts of

the original bearer share corporation. This

individual processed millions of dollars in BMPE

transactions through AEBI accounts.

In addition to the targeted accounts, the bank

had numerous other accounts held in the names of

offshore shell corporations, many controlled

through bearer shares. Many of these accounts

were beneficially owned and controlled by

supposedly legitimate corporations in South

America. There are few, if any, legitimate reasons

why an established business concern would need

or want to conduct financial transactions through

secret accounts held in the names of offshore shell

corporations. Yet, law enforcement has found that

the presence of such accounts is endemic to

international private banking in the United States,

including AEBI.

B. AML risk assessment

AEBI was considered to be operating under a

high risk of money laundering because of its

location in south Florida, a designated High

Intensity Drug Trafficking Area. Its provision of

private banking services to high net-worth

individuals living in Central and South America, a

region known as a source for illegal narcotics,

also put it at risk of money laundering. Yet no

bank of substantial size can possibly monitor

every single transaction and every single account.

Thus, most banks conduct a formal and detailed

risk assessment of each of its products,

transactions, services, geographic locations, etc.,

and then tailor their limited AML and BSA

resources to specifically monitor and control those

areas identified as the highest risk. Prior to May

2002, AEBI did not conduct a risk assessment of

its operations and products, and consequently

failed to identify high-risk areas for enhanced

monitoring.

C. Activity monitoring

The investigation also disclosed weaknesses

in AEBI's account monitoring practices. AEBI

relied upon a proprietary software system to

monitor accounts for suspicious activity. This

system, however, was only capable of identifying

accounts that had breached preset parameters for

external debits and total holdings, not for

identifying suspicious activity patterns. The

bank's written KYC policies and procedures set

out a clear expectation that bank employees assess

their client's transactions and ensure that those

transactions remain consistent with the client's

usual business and activities and make economic

sense, based on their knowledge of the client's

source of wealth and use of funds. To that end,

AEBI RM's were tasked with conducting a

monthly review of the activity occurring in all

transaction accounts under their management,

using Activity Analysis Reports and Activity Detail

Reports distributed by Compliance, with the goal

of identifying any activity which appeared to be

out of pattern for the client or which required

additional investigation. Law enforcement,

however, identified a number of examples of red

flag activity or suspicious activity that was

unmonitored and unquestioned by AEBI,

particularly with respect to the questionable

source of funds from South American parallel

currency exchange market activity. The primary

cause of this failure is that AEBI's account

monitoring system and the detail reports provided

to the RM did not identify the country of origin or

the source of incoming funds. This failure

contributed significantly to the RM's failure to

identify the massive amounts of parallel market

transactions occurring in AEBI accounts.

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 67

Even in situations where accounts breached

parameters and were flagged for review by the

RM, the bank failed to effectively investigate the

account activity. In general, the RM's were not

given reports with sufficient transaction

information to allow them to effectively review

the activity in the account. On a number of

occasions, instead of conducting further

investigation, RM's simply informed Compliance

that the activity in the account was consistent with

the RM's knowledge of the client's business. No

real review was conducted by the RM, and worse,

Compliance did not independently look at the

account activity to corroborate what the RM was

reporting. Numerous similar examples were found

at AEBI where RM's simply "explained away"

parameter breaches, frequently requesting that

Compliance increase the parameters on the

accounts (apparently to avoid having to keep

addressing the compliance issue each month).

The "Rules Based," as opposed to a "Risk

Based," approach of monitoring activity, coupled

with reliance on the RM to provide the assessment

of the quality of account flows, without

independent review and corroboration, was

ineffective and caused AEBI to fail to identify,

report, and prevent suspicious activity. Given that

the account monitoring at AEBI was not a risk-

based program, it was even more critical for

AEBI's compliance personnel to independently

review the account activity. Yet, the limited

"independent reviews" conducted by Compliance

were confined to those accounts that had exceeded

external debit parameters. To the extent no

exceptions were noted, all activity was deemed to

be appropriate.

D. Independent review process

The situation at AEBI was further exacerbated

by deficiencies in AEBI's independent review

process. As part of AEBI's policies and

procedures for account activity monitoring,

Compliance personnel were supposed to perform

spot checks or independent reviews of accounts

that breached parameters. AEBI's compliance

personnel maintained a log of the accounts

reviewed and the results. This log recorded the

name of the responsible RM, the account name,

the parameter breached (holdings, activity-

external debits, or both), and the comments or

explanations of the activity causing the breach. A

review of this log showed significant deficiencies

in AEBI's "independent review" process.

AEBI's local compliance officer was

permitted to exempt accounts from activity

monitoring based only on the judgment of the

compliance officer. Of the total number of

accounts reviewed, the compliance officer had

exempted 35.6 percent from the review process,

many of which were commercial accounts held in

offshore corporate names. There were some

instances of accounts that had consistently

breached parameters for over 21 months and went

without review by Compliance for that same time.

Compliance frequently justified the exemption

based on the fact that the account was commercial

in nature.

E. Prior enforcement activity

The compliance shortcomings at AEBI were

especially disturbing because AEBI had

previously been involved in a significant money

laundering case and, consequently, was operating

under the background of a Department of Justice

Settlement Agreement. The Agreement relating to

the Bank's compliance with the BSA and anti-

money laundering regulations and statutes was

entered into on November 18, 1994. The

settlement grew out of a related indictment and

conviction, in June 1994, of two of AEBI's

employees, as a result of a U.S. Customs Service

investigation into cartel leader Juan Garcia

Abrego. See United States v. Giraldi, 86 F.3d

1368 (5th Cir. 1996); United States v. Castaneda-

Cantu, 20 F.3d 1325 (5th Cir. 1994). This

Settlement Agreement also followed a Cease and

Desist Order and Civil Penalty between AEBI and

the Federal Reserve dated November 1, 1993. As

part of the Settlement, the Department withdrew

and dismissed a civil money laundering complaint

it had filed against AEBI and did not file criminal

charges against the bank. AEBI also agreed to the

following.

• A substantial monetary penalty, comprised of

the withdrawal of AEBI's claim to a $30

million client account that served as collateral

for $19 million in AEBI loans.

• The forfeiture of $7 million.

• A $7 million penalty.

• The bank agreed to spend no less than $3

million on the development and

implementation of policies, procedures, and

training, in order to assure compliance with

the government's BSA/AML regulations and

statutes.

68 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

Since the recent violations were disclosed at

AEBI, the bank has devoted considerable

resources to correct the identified BSA and AML

deficiencies. Employees who failed to take

vigorous action to support compliance efforts

have either left AEBI or left their positions. AEBI

has also identified, reported, and ultimately closed

accounts used to process suspicious transactions,

including each of the Targeted Accounts. AEBI

has fully cooperated with the investigation and

acknowledged responsibility for its actions.

Consequently, the decision was made to resolve

this case with a Deferred Prosecution Agreement

(DPA). On August 6, 2007, a one-count

Information was filed charging AEBI with failing

to establish an AML program in violation of 31

U.S.C. § 5318(h). If AEBI is in full compliance

with all of its obligations after one year, the

government will move to dismiss the Information

with prejudice.

X. Prosecutorial considerations

A. The Department's role

Why should prosecutors and investigators

pursue an investigation of a financial institution

for compliance shortcomings? These

investigations are generally very complex, time

consuming, and resource intensive. Should not the

enforcement of an institution's AML compliance

responsibilities be left to the financial regulators?

AFMLS prosecutors are frequently asked these

questions by the financial community and,

occasionally, by the federal bank regulators.

Money laundering enforcement, perhaps

uniquely, relies on many different entities to

contribute. Each entity—prosecutors, law

enforcement agencies, federal banking regulators,

state banking regulators, the Treasury

Department's FinCEN, and the industry

itself—brings to the table unique knowledge,

skills, and authorities to try to close off the U.S.

financial system from money launderers. The

system works when all cooperate toward the

common goal.

The Department has an important role to play.

In every one of the cases cited above, money

laundering activity—potentially prosecutable

under 18 U.S.C.§ 1957—took place through these

institutions. This activity is very serious—so

serious that, if a bank is convicted of a violation

of § 1957, its federal regulator is required to hold

a hearing to determine whether the bank should

lose its license. While each of the cases discussed

was resolved by a guilty plea, Deferred

Prosecution Agreement, or Non-prosecution

Agreement involving BSA charges, pursuant to

the Principles of Federal Prosecution of Business

Organizations (referred to as the McNulty

Memorandum issued in December 2006),

available at http://www.usdoj.gov/usao/eousa/

foia_reading_room/usam/title9/crm00162.htm, the

fact that there were potential money laundering

charges in these cases made these cases significant

and worthy of criminal enforcement actions.

Moreover, a bank's failure to understand the

source of its client's money often makes it difficult

to show the specified unlawful activity necessary

for a money laundering charge, or that the bank

knew that the money was from some felonious

source. Nevertheless, Congress felt sufficiently

strongly about the issue that it provided for

significant criminal penalties for willful violations

of the BSA, itself.

The seriousness of the offense is due to the

fact that significant harm can result from a bank's

failure to live up to its responsibilities. As shown

in these cases, a single lax branch of a bank, or

even a single employee, can be responsible for

millions in criminal proceeds being laundered

quickly, safely, and cheaply. Underscoring the

bank's obligations in this area, under threat of

criminal sanction, ensures that banks will take

seriously the need to be vigilant. Moreover, the

threat of criminal prosecutions assists the bank

regulators in their job. In that way, BSA

enforcement is similar to other areas of the law

where regulators and criminal prosecutors work in

parallel, such as securities enforcement, with great

effectiveness. Bank regulators have a number of

sanctions available to them, and generally tailor

the remedy to the seriousness of the problem.

Some institutions, however, fail to correct their

conduct, notwithstanding repeated warnings and

penalties from the regulators. The OCC cited

AML deficiencies in Riggs Bank, in over twenty-

six different reports, but were unable to change

the bank's practices in significant ways. In those

circumstances, the Department steps in, as the

regulator of last resort, with criminal sanctions.

B. Proving knowledge

Obviously, millions of dollars of criminal

proceeds move through financial institutions

every day. A bank cannot be held responsible for

every transaction. An institution is criminally

liable for money laundering charges under § 1957

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 69

only if it knowingly engages in a monetary

transaction involving more that $10,000 in

criminally-derived property. Under the principles

of corporate criminal liability, the knowledge

element for a corporation can be established either

by showing a specific individual at a high enough

level within the bank knew of, and furthered, the

money laundering, or by showing the

corporation's collective knowledge.

The concept of collective knowledge permits

the government to prove knowledge of a corporate

entity by offering evidence of the aggregate

knowledge of the corporation's employees. Bank

of New England, 821 F.2d 844, 855 (1st Cir.

1987) ("[Y]ou have to look at the bank as an

institution. As such, its knowledge is the sum of

the knowledge of all... [its] employees. That is,...

the totality of what all the employees know..."). In

the context of large corporations, which typically

have highly compartmentalized structures, use of

the collective knowledge doctrine is "not only

proper but necessary." Id. at 856.

A corporation may be held criminally liable

for conduct even though no single agent intended

to commit the offense, or even knew the operative

facts that constituted the violation. The intent and

knowledge of various agents may be collectively

attributed to the corporation, thereby giving rise to

corporate liability where no individual criminal

liability would exist. The court, in Bank of New

England, instructed the jury that it could find that

the corporation had knowledge of its filing

obligations if any one of its individual employees

had the requisite knowledge, or it could be

inferred from the collective knowledge of all of its

employees.

The concept of willful blindness allows the

government to satisfy the knowledge requirement

of a federal criminal statute by demonstrating that

a defendant willfully, consciously, and/or

deliberately avoided knowledge of certain facts

essential to proof of a criminal violation. The First

Circuit has approved the concept of willful

blindness against a corporate defendant in a BSA

prosecution. In this context, the government may

prove corporate mens rea by demonstrating

organizational indifference to wrongdoing by

corporate employees. "Flagrant organizational

indifference," id. at 855, can satisfy the wilfulness

requirements. The court, in Bank of New England,

held that it was proper for the district court to

instruct the jury that it could infer culpable

knowledge if it found that the bank had

consciously avoided learning about the currency

transaction reporting requirements as a result of

some "flagrant organizational indifference." Id.

The government may show "flagrant

organizational indifference" to the requirements of

the law by the following evidence.

• The bank's failure to adequately inform its

employees of the legal duty to report.

• The bank's failure to implement an effective

compliance program.

• The bank's failure to properly respond to

information it received relating to the

reporting requirements.

• The bank's own stated policies or its failure to

implement those policies.

• The bank's response to various bits of

information it received

If this information adds up to flagrant

organizational indifference to the reporting

requirements, it supports a finding of willfulness

as well. Id.

C. Factors to consider in prosecutions

The Department does not target specific

financial institutions for prosecution. In every one

of the cases cited above, the bank's conduct

aroused the attention of prosecutors and

investigators who were investigating other

criminal activity. Attention turned to the bank

during the course of the investigation as a result of

the bank's conduct within the scope of the

criminal activity under investigation, or as a result

of the bank's conduct during the course of the

investigation. When initial scrutiny of the bank's

conduct raised serious concerns about its activity

and compliance shortcomings, the investigations

proceeded into full criminal investigations.

Once a criminal investigation begins, several

factors are considered in assessing whether an

institution's violation of the BSA warrants

criminal remedies. Each of these factors is

reflected in the investigations described above,

and there is every reason to believe that these are

the factors that prosecutors will continue to look

to in evaluating cases in the future.

• The violation must be willful. A criminal

violation of the BSA must involve evidence

(beyond a reasonable doubt) that a decision

was "willful," that is, the bank understood its

obligations under the BSA and, nevertheless,

70 UNITED STATE S ATTORNEYS' BULLETIN SEPTEMBER 2007

deliberately decided to violate the law. This is

the highest burden the law allows and, as

prosecutors, we are mindful that the criminal

law is not a law of negligence.

• The decision whether to file a SAR is a

judgment call. Under the BSA, a financial

institution is required to file a SAR where it

"knows, suspects, or has reason to suspect one

of the following."

• That after an appropriate investigation,

the financial institution determined that it

is a transaction with no apparent business

purpose, or is not the sort that the

customer would be expected to engage in.

• That it is derived from illegal funds or

designed to hide the origin of the funds.

Since this is not a clearly objective standard,

the government would need strong and

compelling evidence that the transactions in

question were suspicious, and that the institution,

in fact, knew they were suspicious, in order to

prove a criminal violation.

• There must be evidence of a systemic failure.

The government will look closely at whether

the financial institution has a healthy and

effective AML program. If the bank has a

program to find potentially suspicious

activity, and after researching the transactions

involved determines that no SAR need be

filed, it would be extremely rare for the

government to second-guess that decision,

even if the decision was clearly wrong.

However, where the bank fails to even know

about the transaction as a result of a poor

AML program, the government will be far

less sympathetic. Most prosecutions of

institutions for BSA violations have centered

on this factor.

What does an effective compliance program

look like? In the Department's view, the U.S.

Sentencing Commission has put forth the best

description of an effective compliance program in

section 8B2.1 of the United States Sentencing

Guidelines. Some of the operative factors include

the involvement of high-level personnel in the

operation of the program, appropriate incentives

to employees to ensure effective compliance, as

well as education and independent testing of the

effectiveness of the program. The mere existence

of a paper program is insufficient. Prosecutors

will not hesitate to investigate whether a

compliance program has any teeth.

• The bank has a duty independent of its

regulator. While regulators periodically

assess an institution's AML program, the BSA

makes clear that the responsibility for

determining whether the program is effective

rests on the institution, not the regulator.

Prosecutors will consider whether an

institution received favorable reports from its

regulator, but will also look behind those

reports to determine whether such clean bills

of health were reasonable. In a number of

instances, prosecutors have found no

justification for a regulator's conclusion of a

satisfactory AML program and, as such, have

given it little weight.

As a result of this analysis, financial

institutions that take their obligations seriously,

and that fund and maintain a real AML program,

are well positioned to avoid criminal scrutiny for a

BSA violation. Institutions that do not take their

obligations seriously may face a criminal

enforcement action if their conduct should come

within the scope of a criminal investigation.

XI. Conclusion

Banks are the principal gateway into the U.S.

financial system and have been given major

responsibilities for safeguarding that gateway and

trying to detect and prevent criminal proceeds, or

terrorism funds, from entering the financial

system. These responsibilities are imposed by law,

and there must be sanctions for failing to fulfill

these responsibilities. Whenever it is determined

that a significant amount of criminal proceeds are

flowing into or through a financial system, it

should be examined to determine if it has effective

AML policies and practices, or whether the

institution is shirking its duties. If it is the latter,

then the seriousness of the violations should be

considered to determine whether a civil or

criminal enforcement action is warranted.

Pursuant to § 9-105.300 of the United States

Attorneys' Manual, in any criminal case under 18

U.S.C. §§ 1956 or 1957 or 31 U.S.C.§ 5322, in

which a financial institution, as defined in 18

U.S.C. § 20 and 31 C.F.R. § 103.11, would be

named as a defendant, or in which a financial

institution would be named as an unindicted

coconspirator or allowed to enter into a Deferred

Prosecution Agreement, Criminal Division

approval through AFMLS is required before any

indictment, complaint, information, or Deferred

Prosecution Agreement is filed. The attorneys in

SEPTEMBER 2007 UNITED STATES ATTORNEYS' BULLETIN 71

AFMLS should be consulted when such

investigations are initiated. They can be reached at

202-514-1263.

ABOUT THE AUTHORS

Lester M. Joseph is the Principal Deputy Chief

in the Asset Forfeiture and Money Laundering

Section (AFMLS). He has been a Deputy Chief

since the Money Laundering Section was created

in 1991. He became Principal Deputy Chief in

January 2002. Mr. Joseph joined the Department

in 1984 as a Trial Attorney in the Organized

Crime and Racketeering Section. From 1981 to

1984, he was an Assistant State's Attorney in

Cook County (Chicago), Illinois.

John Roth is the Chief of the Fraud and Public

Corruption Section for the U.S. Attorney's Office

in the District of Columbia. He is the former Chief

of the Asset Forfeiture and Money Laundering

Section, as well as the Narcotic and Dangerous

Drug Section of the Department's Criminal

Division. Mr. Roth joined the Department in 1987

as an Assistant U.S. Attorney in the Eastern

District of Michigan. He then served in the

Southern District of Florida, as Chief of the

Narcotics Section. He is currently detailed to the

Criminal Division as an acting Deputy Assistant

Attorney General, responsible for narcotics and

money laundering enforcement.a

72 UNITED STATE S ATTORNEYS' BULLETIN September 2007

NOTES

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